Outlook Gloomy for Universal Forest

Universal Forest Products Inc. (UFPI - Analyst Report) recently announced to undertake stringent economic measures including job cuts citing weaker sales in the first five months of year 2011. The cost-reduction measures are expected to save roughly $10 million annually for the company.

Sales in the first five months fell 9.5% year over year to $765 million, including a 15% decline in net sales to retail customers. Moreover, weakness in lumber market coupled with higher fuel prices led to a decline in gross margin to 10.5%. Customer demand is expected to remain soft for the remainder of fiscal year 2011.

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, Universal Forest's financial felt the pinch rather drastically.

In the first quarter 2011, the company posted disappointing results. Net earnings were a loss of 19 cents per share compared with 5 cents 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 and was below the Zacks Consensus Estimate of $418.0 million.

In addition, higher cost of sales due to volatile lumber prices added to the decline. We find that the company faces considerable volatility in the cost of commodity lumber products from its primary producers, which further adds to its worry. Moreover, Universal Forest faces stiff competition from the likes of Bluelinx Holdings Inc.(BXC - Snapshot Report) and Builders FirstSource Inc. (BLDR - Snapshot Report).

The company will report its second quarter financial results on July 13.

We currently maintain an Underperform recommendation on the stock.

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