Disappointing second quarter results and concerns over volatility in the lumber market restricted positive response for Universal Forest Products Inc. (UFPI), following its earnings release on July 14, 2010. A healthy top line on the back of end markets growth was more than offset by higher cost of sales due to volatile lumber prices in the quarter.
Earnings Review
Universal Forest reported a net income decline despite its healthy top-line growth. Net income slipped 14.9% year over year to $13.7 million or 70 cents per share compared with $16.1 million or 83 cents per share in the second quarter of 2009, primarily due to higher costs. Earnings per share also fell short of the Zacks Consensus Estimate of 89 cents.
Net sales in the second quarter 2010 increased 24% year over year to $638.6 million, primarily based on healthy growth in all the markets served.
Do-It-Yourself/retail sales increased 8.5% year over year to $315.8 million; Industrial packaging/components sales jumped 36.0% year over year to $179.2 million; Site-built construction revenue was $72.2 million, up 19.1% year over year; and Manufactured housing sales shot up 82.5% to $81.6 million in the quarter.
Detailed discussion on the earnings release can be found here: Lackluster 2Q for Universal Forest
Agreement of Analysts
Following the company’s second quarter earnings release, analysts appear to be cautious for fiscal 2010 and 2011. Suffice it to say that there has been a downward estimate revision by one analyst for 2010 and 2011 in the last 7 days and by four analysts for 2010, while 3 analysts have thumbed their estimates down for 2011 in the last 30 days.
Disposition of higher cost inventory in the quarters ahead will impact revenue growth, while expectation of higher lumber costs will hit margins. Also, ongoing challenges in the housing and remodeling markets will impact the company’s Site-built and Do-ityyourself businesses, respectively.
Magnitude of Estimate Revisions
In the last 7 days, EPS estimates for 2010 fell from $1.55 to $1.45 and for 2011 from $2.26 to $2.18. In the last 30 days, estimates went down from $1.71 to $1.45 for 2010 and from $2.25 to $2.18 for 2011.
Neutral Reiterated
Universal Forest Products is a manufacturer and distributor of lumber, composite wood, plastic and other building products. We believe the company is well positioned to benefit from its industrial and manufactured housing businesses over the long term. Accrual of new products in both the markets has created opportunities for growth. Moreover, the addition of Shepherd Distribution enhanced the company’s distribution capabilities in the manufactured housing market.
However, in the near term, challenging conditions are anticipated to persist throughout 2010. Results will be largely influenced by an enormous level of higher cost inventory, weak housing market, and concerns over the remodeling market.
Besides, Universal Forest’s huge dependence on general market conditions and growth in end markets increase top-line risks in the event of any adverse conditions. Moreover, significant volatility in the cost of commodity lumber products from primary producers is problematic. The company derives a large portion of its sales from one single customer, which exposes it to customer concentration risks. Prime competitors of the company include International Paper Co. (IP), Louisiana-Pacific Corp. (LPX) and Georgia-Pacific LLC.
We remain cautious about Universal Forest’s growth prospects in the second half of 2010 and believe the company will perform roughly in line with the market. We currently maintain a Neutral recommendation on the stock, which is supported by a Zacks #3 (Hold) Rank.
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