Underperform on Universal Forest

We recently maintained a Neutral recommendation on Universal Forest Products Inc.(UFPI - Analyst Report) in anticipation of the lack of positive catalysts for the quarters ahead.

The Michigan-based company engineers, manufacturers, treats, distributes, and installs lumber, composite wood, plastic and other building products for its do-it-yourself (DIY), site-built construction (homebuilders), manufactured housing, and industrial markets.

The global economic meltdown with its far reaching effects on businesses worldwide greatly affected the US housing market and, consequently, United Forest’s financial felt the pinch rather drastically. Of late things have started stabilizing with the company being well poised to leverage from its industrial and manufactured housing businesses in the quarters to come.

In the first quarter 2011, the company posted disappointing results. Net earnings were a loss of 19 cents per share compared with a 5 cent per share gain reported in the year-ago quarter. Results were below the Zacks Consensus Estimate of 1 cent per share gain in the quarter.

The company’s top line in the quarter plummeted 1.5% year over year to $387.2 million and was below the Zacks Consensus Estimate of $418.0 million. The decline in sales is attributable to loss in production days due to bad weather conditions. Site-built and manufactured housing sales also went down because of lower federal incentives and lower DIY/retail sales due to lower inventory stocking compared with prior-year period.

Moreover, higher cost of sales due to volatile lumber prices added to the downfall. We believe the company faces considerable volatility in the cost of commodity lumber products from its primary producers, which further adds to its headwinds. Moreover, Universal Forest’s precarious dependence on general market conditions and growth in end markets increase top-line risks in the event of any adverse conditions.

The company faces stiff competition from peers like Bluelinx Holdings Inc.(BXC - Snapshot Report) and Builders FirstSource Inc. (BLDR - Snapshot Report).

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