Universal Forest Products Downgraded – Analyst Blog

We recently downgraded our rating for Universal Forest Products Inc. (UFPI) from Outperform to Neutral, primarily due to a host of factors including dependence on general market conditions and growth in end markets, volatility in cost of lumber products and huge customer concentration.

 

 

Universal Forest Products, a manufacturer and distributor of lumber, composite wood, plastic and other building products, reported encouraging results for the first quarter of fiscal year 2010. The company reported net earnings of $1.0 million, up from a net loss of $1.3 million in the same quarter of fiscal 2009. EPS was 5 cents, compared with a net loss of 6 cents per share in the year-ago quarter. The reported EPS easily surpassed the Zacks Consensus Estimate of 1 cent. The rise in net earnings was due to an 8.7% increase in revenue. 

 

Revenue increased from $361.7 million to $393.0 million during the first quarter of fiscal 2010, primarily due to a 50% hike in composite lumber selling prices as supply decreased in comparison with the total demand.

 

 

We believe that Universal Forest Products stands well-positioned to expand into new markets. Also, the company’s industrial unit is benefiting from acquisitions and the continued addition of new customers. The company expects to achieve roughly $3 billion in sales and also improve its productivity by 15% by the end of fiscal year 2012.

 

However, Universal Forest Products’ huge dependence on weather conditions and growth in end markets can be an impediment in adverse economic conditions. The recent economic crisis hurts the company badly as consumer spending for large repair/remodel projects declined significantly. In addition, volatility in the cost of lumber products from primary producers and high customer concentration risk might affect the company’s financials.  

 

Prime competitors of the company include International Paper Co. (IP), Louisiana-Pacific Corp. (LPX), and Georgia-Pacific LLC. We have downgraded Universal Forest Products from Outperform to Neutral, which is in line with its Zacks #3 Rank (Hold).