Shares of Idaho-based building materials producer, Boise Cascade (US:BCC), traded more than 3% higher on Tuesday following a strong second quarter earnings report. The company also announced a 33% increase in its quarterly dividend earlier this week, boosting it to 20 cents per share.

Unfortunately the dividend yield continues to shrink due to the growing share price.

Fintel initiated coverage on the stock with its positive quantitative research screened recommendation back in May, with shares trading ~55% higher since then. 

Boise Cascade reported adjusted earnings per share (EPS) of $3.67. While a year-over-year decline of 33%, the company still managed to surprise Wall Street with its robust performance, beating the consensus of $2.54.

Sales came in at $1.82 billion, topping the $1.70 billion consensus figure. Its adjusted EBITDA was reported at $221 million, down 30% year-over-year but beating the market consensus of $164 million.

The results surprise was driven by stronger than expected EWP (engineered wood products) pricing, with LVL (laminated veneer lumber) and I-joist realizations ahead by 5% and 7%, respectively. Forecast-beating EWP, plywood, BMD (building materials distribution) volumes and gross margins also contributed to the company's impressive performance.

Looking at Fintel's metrics on management effectiveness, although most performance measurements are showing declines with the slowing sales and volumes, the OCROIC (operating cash return on invested capital) continues to remain steady at 0.33 down from highs in Q4 and Q1. 

Management's underlying efficiency at managing capital investment remains strong.

Growth Opportunities

The company maintained its capital spending outlook for the year at $120 million to $140 million but hinted at the possibility of an increase upon approval of several organic reinvestment opportunities. 

These include potential additional BMD facility expansions or lease buyouts, and investments to drive further efficiencies within the Wood Products segment. Given the solid free cash flow generation, analysts anticipate that a substantial amount of cash will be returned to shareholders over the next 12-18 months.

Looking ahead, management cited an encouraging EWP volume bounce back in a more normalized operating environment, while they expect EWP prices to stabilize at still elevated levels.

On the earnings call, management also highlighted a healthy pipeline of reinvestment opportunities.

While the earnings report was positive overall, the company expects a slight sequential decline in EWP realizations in Q3. Inflationary pressures from OSB (oriented strand board that is similar to particle board), which is used in I-joist webstock, are also expected to pose a slight headwind.

Analyst Views

Several analysts have made significant upward revisions to their forecasts for Boise Cascade, reflecting the 2023 upside.

Truist Securities analyst Michael Roxland was bullish post result, coming away with confidence that Wood Products margins can be maintained at 15-20%. 

The analyst highlighted that while EWP prices are expected to modestly decline, they will remain well above pre-pandemic levels.

Roxland bumped up his target price from $100 to $130 for his ‘buy’ call on the stock.

Fintel’s consensus target price of $84.86 suggests there are several analysts in the market that remain bearish on this story. Several argue that the company continues to face headwinds and trades on a premium valuation relative to peers which drives an even spread of 'buy' and 'hold' calls across firms. We expect the average target price will drift higher after the beat as analysts remodel projections.

The forward consensus revenue estimate projections for the coming years are shown in the chart below.

High Quant Scores

Some of the key quantitative drivers on Fintel's quant dashboard are included below. These factors all take part in generating the QVM (Quality + Value + Momentum) score. 

A leaderboard with stocks that have the highest QVM score currently found here.

Despite a 55% rise in the share price year-to-date, other analysts in the street maintained neutral calls on Boise Cascade. They believe the benefits of the company's strong performance and potential for shareholder returns are fully reflected in the current valuation. 

Nonetheless, the strengthening macro backdrop for the wood product segment and the resilience of BMD margins continue to keep institutions buying.