The housing market’s volatility, influenced by the pandemic, economic shifts, and rising interest rates, hasn’t dampened the construction sector as expected.

High-interest rates discouraged existing homeowners from selling, pushing demand towards new construction.

This trend has particularly benefited companies like Boise Cascade (BCC), a supplier of wood products and building materials, which has seen a significant increase in profitability.

However, concerns over the high-interest environment have caused ratings agencies like S&P to be cautious about the name.

Today, we’re delving into Boise Cascade’s credit risk profile using Uniform Accounting to assess if rating agencies have been accurate in their evaluation of the company.

We can use Uniform Accounting to put the company’s real profitability up against its obligations and decide for ourselves the true risk of this business.

Also below is a detailed Uniform Accounting tearsheet of the company.

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The housing market has been volatile in recent years, with periods of high demand followed by periods of low demand.

This volatility is being driven by several factors, including the pandemic, the state of the economy, and rising interest rates.

Surging inflation led to the most aggressive interest rate policy by the Fed ever, causing mortgage rates to increase.

Most investors thought this would be the end of the housing bubble. Demand and prices would fall, and construction would stop.

They couldn’t be more wrong…

High-interest rates certainly slowed down demand for home purchases. But it turns out high mortgages also mean that existing homeowners do not want to sell.

If they did, they would have to lock in a much higher mortgage rate on their purchase instead of the near 0% rates they secured during the pandemic.

While this is the case, some people have to buy a home to build a life. They might get married, have children, work or study at a new location, or just simply move for other reasons.

With existing homes not available, there is only one place they can go to: the construction companies.

The industry is well alive, and now these companies are supplying the entirety of the demand for houses. A lot of construction companies already benefited from this trend in the last two years.

Another big beneficiary of this is the suppliers of the construction industry, such as Boise Cascade (BCC).

It manufactures and distributes wood products and building materials that are used in residential, commercial, and industrial applications by homebuilders, contractors, and retailers.

The rising demand for construction combined with higher prices of the materials produced resulted in high profitability for the company.

Boise Cascade’s Uniform return on assets (“ROA”) jumped from 13% in 2020 to 37% in 2021, which it managed to sustain in 2022.

However, rating agencies are concerned about the high-interest rate environment, and a decline in construction activity will hurt the company going forward.

S&P gave the company a “BB-” rating, indicating a significant risk of default at nearly 11% over the next five years. It also puts the company in the risky high-yield basket.

Given its solid financial standing, we believe Boise Cascade deserves a more secure rating.

We can figure out if there is a real risk for this company by leveraging the Credit Cash Flow Prime (“CCFP”) to understand how the company’s obligations match against its cash and cash flows.

In the chart below, the stacked bars represent the firm’s obligations each year for the next five years. These obligations are then compared to the firm’s cash flow (blue line) as well as the cash on hand available at the beginning of each period (blue dots) and available cash and undrawn revolver (blue triangles).

The CCFP chart shows that Boise Cascade’s cash flows alone are more than enough to serve all its obligations going forward.

The chart indicates that the company is on solid financial ground and is very likely to fulfill its obligations with ease in the next five years.

The company has limited debt maturities in the next 5 years and it can easily handle its obligations with its massive cash flows.

Moreover, with the continuing demand for new housing, Boise Cascade also has opportunities to sustain high profitability levels over the long run.

Our review of Boise Cascade shows that the company has a low risk of default, contrary to what rating agencies indicate.

Therefore, we are assigning an “IG3+” rating to the company, which places it in the investment-grade basket, with a risk of default of only about 1%.

It is our goal to bring forward the real creditworthiness of companies, built on the back of better Uniform Accounting.

To see Credit Cash Flow Prime ratings for thousands of companies, click here to learn more about the various subscription options now available for the full Valens Database.

SUMMARY and Boise Cascade Company (BCC:USA) Tearsheet

As the Uniform Accounting tearsheet for Boise Cascade Company (BCC:USA) highlights, the Uniform P/E trades at 10.9x, which is below the global corporate average of 22.4x, but above its historical P/E of 6.6x.

Low P/Es require low EPS growth to sustain them. In the case of Boise Cascade, the company has recently shown a 19% Uniform EPS growth.

Wall Street analysts provide stock and valuation recommendations, that in general, provide very poor guidance or insight. However, Wall Street analysts’ near-term earnings forecasts tend to have relevant information.

We take Wall Street forecasts for GAAP earnings and convert them to Uniform earnings forecasts. When we do this, Boise Cascade’s Wall Street analyst-driven forecast is for a 44% and 5% EPS shrinkage in 2023 and 2024, respectively.

Based on the current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Boise Cascade’s $139 stock price. These are often referred to as market-embedded expectations.

Furthermore, the company’s earning power in 2022 was 6x the long-run corporate average. Moreover, cash flows and cash on hand are 8x its total obligations—including debt maturities and capex maintenance. The company also has an intrinsic credit risk that is 70bps above the risk-free rate.

Overall, this signals a low credit and dividend risk.

Lastly, Boise Cascade’s Uniform earnings growth is below its peer averages and is trading below its average peer valuations.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research