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Universal Forest Products Up 18% in a Year: More Room to Run?
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Universal Forest Products Inc. (UFPI - Free Report) has been gaining on its acquisition strategy, robust construction market and year-over-year gain in both top and bottom line over the past few quarters. In a year’s time, the stock has gained 35.2%, outperforming the industry’s rise of 17.7%. Though these positives instil optimism, rising costs and shrinking margins raise concern. Let’s delve deeper.
Universal Forest Products recently reported mixed results for the second quarter of 2018. The company’s top line surpassed the Zacks Consensus Estimate by 8.4% while the bottom line missed the mark by 5.3%.
Catalysts Driving Growth
Over the past few quarters, the company’s top and bottom lines have witnessed sharp gains owing to a strengthening construction market. In second-quarter 2018, earnings and sales increased 29.1% and 20.7% year over year. Moreover, given that housing starts and demand for repair and remodeling activities continue to be strong, Universal Forest Products expects to gain from the existing product portfolio, initiatives to improve production efficiency and solid opportunities in the industrial market.
Overall fundamentals of the housing market have remained strong so far this year and are expected to improve further in 2019. Over the long term, Universal Forest Products aims to grow sales roughly 4-6% above positive GDP growth. New product sales are anticipated to constitute at least 10% of total sales.
Moreover, acquisitions have been Universal Forest Products' preferred way of boosting product portfolio and cashing in on business opportunities. The company has acquired Spinner Wood Products and Great Northern Lumber in January as well as Expert Packaging and Fontana Wood Products in April. In June, the company completed the buyout of North American Container Corp. These buyouts will help drive revenues significantly in the near term.
Universal Forest Products has been raising its dividend payout ratio consistently. It has hiked the semi-annual dividend by 18 cents per share this year. Also, it used roughly $1.8 million for repurchasing common shares this year.
Concerns
An unusual rise in the cost of lumber products sold by primary producers has increased the cost of inventory, thereby limiting the company’s profitability margin. Selling price of lumber products are dependent on factors like government policies, environmental regulations, weather conditions, economic conditions and natural disasters.
Rise in costs has substantially dented the company’s margin over the last few quarters. There has been a significant decline of 100 bps in gross margin last quarter due to higher transportation costs on increased prices of fuel.
Moreover, reliability and delivery issues of rail carriers and shortage of trucks led to an unwarranted increase in cost of sales, thereby impacting profitability. In the second quarter of 2018, the company recorded a 22.1% increase in the cost of sales and 10.6% hike in selling, general and administrative expenses.
Armstrong Flooring reported better-than-expected earnings in three out of the last four quarters, the average beat being 29.2%.
Norbord’s earnings have surpassed the consensus estimate in all of the trailing four quarters, the average being 9.3%.
Potlatch’s earnings for the current year are likely to grow 16.5%.
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Universal Forest Products Up 18% in a Year: More Room to Run?
Universal Forest Products Inc. (UFPI - Free Report) has been gaining on its acquisition strategy, robust construction market and year-over-year gain in both top and bottom line over the past few quarters. In a year’s time, the stock has gained 35.2%, outperforming the industry’s rise of 17.7%. Though these positives instil optimism, rising costs and shrinking margins raise concern. Let’s delve deeper.
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Universal Forest Products recently reported mixed results for the second quarter of 2018. The company’s top line surpassed the Zacks Consensus Estimate by 8.4% while the bottom line missed the mark by 5.3%.
Catalysts Driving Growth
Over the past few quarters, the company’s top and bottom lines have witnessed sharp gains owing to a strengthening construction market. In second-quarter 2018, earnings and sales increased 29.1% and 20.7% year over year. Moreover, given that housing starts and demand for repair and remodeling activities continue to be strong, Universal Forest Products expects to gain from the existing product portfolio, initiatives to improve production efficiency and solid opportunities in the industrial market.
Overall fundamentals of the housing market have remained strong so far this year and are expected to improve further in 2019. Over the long term, Universal Forest Products aims to grow sales roughly 4-6% above positive GDP growth. New product sales are anticipated to constitute at least 10% of total sales.
Moreover, acquisitions have been Universal Forest Products' preferred way of boosting product portfolio and cashing in on business opportunities. The company has acquired Spinner Wood Products and Great Northern Lumber in January as well as Expert Packaging and Fontana Wood Products in April. In June, the company completed the buyout of North American Container Corp. These buyouts will help drive revenues significantly in the near term.
Universal Forest Products has been raising its dividend payout ratio consistently. It has hiked the semi-annual dividend by 18 cents per share this year. Also, it used roughly $1.8 million for repurchasing common shares this year.
Concerns
An unusual rise in the cost of lumber products sold by primary producers has increased the cost of inventory, thereby limiting the company’s profitability margin. Selling price of lumber products are dependent on factors like government policies, environmental regulations, weather conditions, economic conditions and natural disasters.
Rise in costs has substantially dented the company’s margin over the last few quarters. There has been a significant decline of 100 bps in gross margin last quarter due to higher transportation costs on increased prices of fuel.
Moreover, reliability and delivery issues of rail carriers and shortage of trucks led to an unwarranted increase in cost of sales, thereby impacting profitability. In the second quarter of 2018, the company recorded a 22.1% increase in the cost of sales and 10.6% hike in selling, general and administrative expenses.
Zacks Rank and Stocks to Consider
Currently, Universal Forest Products carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the industry are Armstrong Flooring , Norbord Inc. and Potlatch Corp. (PCH - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Armstrong Flooring reported better-than-expected earnings in three out of the last four quarters, the average beat being 29.2%.
Norbord’s earnings have surpassed the consensus estimate in all of the trailing four quarters, the average being 9.3%.
Potlatch’s earnings for the current year are likely to grow 16.5%.
Wall Street’s Next Amazon
Zacks EVP Kevin Matras believes this familiar stock has only just begun its climb to become one of the greatest investments of all time. It’s a once-in-a-generation opportunity to invest in pure genius.
Click for details >>