Boise Cascade Company

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

Boise Cascade Company is a building materials manufacturer and distributor, primarily focused on wood products and building materials. They serve residential, commercial, and industrial construction markets, and their operations are vertically integrated, which creates stability across cycles.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Boise Cascade Company (BCC) operates within the highly cyclical building products industry, manufacturing and distributing a diverse range of engineered wood products (EWP), plywood, lumber, and other building materials.

  • Revenue Streams: BCC’s revenue is derived primarily from two segments: Wood Products (manufacturing) and Building Materials Distribution (BMD). The Wood Products segment involves the manufacturing of EWP, plywood, and lumber. The Building Materials Distribution segment, which is approximately two-thirds of their revenue, involves a comprehensive distribution network.
  • Industry Trends: The building materials industry is influenced by factors such as housing starts, repair and remodeling activity, macroeconomic conditions, and lumber/wood prices. Recent trends show a strong demand for engineered wood products due to their structural integrity and versatility, however, there has also been high inflation in building supplies in general.
  • Competitive Landscape: The industry is competitive, with large players such as West Fraser Timber and Weyerhaeuser, but also smaller local suppliers as well. There is also significant risk associated with the volatility of the raw lumber market, which is dependent on supply and demand for natural resources.
  • What Makes BCC Different: Boise Cascade Company stands out due to its integrated operations. This means it has its own production as well as its own distribution capabilities that enable control over costs and provides a hedge against volatility in the market. This is not commonly seen in many companies within its respective industry. Its scale and relationships with key supply partners also help it sustain good performance in the market.

Moat Analysis

  • Moat Rating: 2 / 5 BCC exhibits a narrow moat. While the company has a wide distribution network, its product offerings and market are easily replicated by competition. Despite its scale, the industry dynamics limit its potential for a wide moat. The company does have a slight advantage due to having control over production and distribution but that is the extent of its moat. Below is why it fails to be a wide moat company:

    • Brand Strength: Although their brands are well known to those within the building industry, these brands are not a strong factor that has the ability to generate a premium for the company, and these products are not sought out by consumers. They are more akin to commodities than brand value generating products.
    • Switching Costs: For their main product line, wood, switching costs are relatively low, as most construction companies simply buy materials from the cheapest supplier that can fulfill their needs. For their EWP, there are some slightly elevated switching costs as companies usually have agreements with their suppliers and prefer the stability.
    • Network Effect: This moat does not exist with the company, as its business is primarily focused on selling to consumers, not on building a platform with user to user interaction.
    • Cost Advantages: BCC does have some cost advantages stemming from its scale as one of the biggest in the industry, but it isn’t one of the lowest cost producers and there is still a fair bit of parity. So, while there is some cost advantage, it is not extremely wide to be considered a great moat.
    • Intangible Assets: BCC is not really a technology or pharmaceutical company, so patents are not something they focus on. While they have good relationships with their suppliers, this also isnt something that is difficult to overcome for their competitors.

Risks to the Moat and Business Resilience

  • Cyclical Industry: The housing and construction market are highly cyclical, making the revenue and profits of BCC susceptible to economic downturns. The company’s earnings can face volatility with this industry.
  • Commodity Price Fluctuations: BCC’s profitability is highly influenced by fluctuations in lumber, plywood, and other wood prices that they source on a regular basis. Volatility in these prices has been a significant headwind to the company’s profitability in the past.
  • Competition: The industry is extremely competitive, with both large and small players vying for market share, which can erode the company’s pricing power.
  • Technological Disruption: While the wood industry has not seen technological advances that have completely disrupted it so far, this can be a potential threat in the future. New technologies could create better construction materials, or make the ones BCC manufactures obsolete.
  • Regulatory Risk: The business of BCC is closely tied to housing and construction, which are both governed by regulatory agencies. While they aren’t directly affected on the federal level, local regulatory changes can harm profits for them.
  • Dependence on Lumber Supply: BCC is heavily dependent on external suppliers for a large portion of their raw materials, which can be unpredictable and they have little control over prices or supply.
  • Business Resilience: The company has done a good job of surviving past business cycles due to its vertical integration and wide distribution network, and its debt metrics, but if a big economic downturn occurs, the company could potentially run into issues.

Financial Analysis

  • Income Statement: Over the most recent quarters, BCC has shown decent revenue growth, but with increased prices in their products, which means sales volumes haven’t grown nearly as much. Even though revenues have grown steadily, profitability has been inconsistent, partially due to the prices of lumber.
  • Balance Sheet: The company has maintained a very solid balance sheet, with sufficient cash and a healthy amount of debt. They have been consistently deleveraging the balance sheet. Goodwill has remained at fairly constant levels after the company’s acquisitions in the past year.

  • Cash Flow Statement: While the company has seen strong cash flows from operations, these are mostly utilized for investment and expansion and a lot less on dividends or stock repurchases. This is because, although the company has stable revenues in their industries, their growth requires aggressive reinvestment in their business.

    • Recent Earnings Call Highlights:
      • During their latest call, management has noted that they see strong demand in housing markets, despite higher interest rates. They have said that they are trying to be strategic in pricing in the face of rising input costs, to prevent the company’s profit margins from falling further.
      • The company has also stated that it expects lower demand in its business segments in the second half of 2023 due to a cooling housing market, but it still expects an overall strong year for them.
      • Management has stated that their focus is on continued improvement in distribution and manufacturing of new technologies such as mass plywood.
      • They have said that they continue to review ways to make acquisitions and divestitures.

Understandability Rating

Understandability: 2 / 5 The business of Boise Cascade is fairly simple at a high level. They essentially produce wood products and then sell them. There isn’t anything highly complicated with what they do. The complexity comes from trying to analyze the supply chain, competition, pricing, and the general economics of the lumber market, which makes valuation very difficult.

Balance Sheet Health Rating

Balance Sheet Health: 4 / 5 BCC has a solid financial footing, and is more than capable of weathering economic downturns as seen in the 2008 recession. The company continues to build a stronger balance sheet each year, and their debt/asset ratio shows a positive trend.

Conclusion

Boise Cascade Company has a long and established operating history with a stable and resilient business. While the company has a very complex business, they have shown competence in managing their business while also maintaining a healthy balance sheet. The biggest problem for investors, is that while the company has some advantages in cost, scale, and integrated operations, these are easily eroded by industry dynamics, which results in high volatility to their overall profits and margins over long term and hence results in the narrow moat. The cyclicality of the industry, volatility in input costs, and competition prevent the company from having a higher moat rating, and it appears this will persist going forward.