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We recently maintained our Neutral recommendation on Universal Forest Products, Inc. (UFPI - Analyst Report), a large player in the lumber supply chain, anticipating its performance to be in line with the broader market.

Why Neutral?

Universal Forest Products has compelling long-term growth prospects. The company looks forward to improving its top-line growth through additions of new customers and products to its portfolio. Revenue generation is targeted to reach $3 billion with operating margins at normal historical levels by 2017.

We believe Universal Forest is progressing well towards achieving its set targets. The stock has grown over 24% year-to-date and is expected to continue with the momentum in the quarters ahead.

Universal Forest reported impressive financial results for the second quarter 2013 on Jul 17. Earnings per share in the quarter grew 18% year over year and revenues too soared 24% on the back of double-digit growth in the five market segments served by the company. Lumber prices increased 15% year over year.

Despite all these positives, near-term concerns surrounding the stock have forced us to remain on the sidelines for Universal Forest. The company’s precarious dependence on general market conditions exposes it to top-line risks in the event of any adverse condition. Moreover, significant volatility in the cost of commodity lumber products from primary producers is one of the prime causes of concern for the company.

Other Stocks to Consider

Universal Forest currently has a market capitalization of $811 million. Other stocks to watch out for in the industry are Builders FirstSource, Inc. (BLDR - Snapshot Report) and USG Corporation (USG - Snapshot Report), each with a Zacks Rank #2 (Buy).

The company’s nearest competitor Louisiana-Pacific Corp. (LPX - Snapshot Report) is slated to release its second quarter 2013 results on Aug 6, 2013.

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