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Analyst Blog

We recently downgraded our recommendation for Michigan-based Universal Forest Products Inc. from Neutral to Underperform.

The Michigan-based company primarily 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 company’s financials were hard hit by the recent global economic meltdown, which had far reaching effects on businesses worldwide, especially those connected with the US housing market. Weak sales to retail customers and lower spending on home improvement items greatly impacted Universal Forest’s top line in the third quarter 2011. Revenue in the third quarter decreased 2.4% year over year to $468.9 million and also registered a sequential decline of 13.8%.

Moreover, Zacks Estimate for the fourth quarter 2011 now stands at a loss of 16 cents as compared with earnings of 29 cents as reported in the third quarter 2011. As for the quarters ahead, we are concerned about consumer spending levels and management’s expectation of soft customer demand throughout the fiscal year 2011. Moreover, housing markets in the US still remain in doldrums causing a major threat to overall growth.

According to The Home Improvement Research Institute, acceleration in the growth of home improvement will receive a setback from weak US housing market. Growth of home improvement product sales is expected to average 3.7% between 2012 and 2013.

Moreover, Universal’s excessive dependence on general market conditions and growth in end markets increase its top-line risks in the event of any adverse conditions. Besides, volatility in the cost of lumber products from primary producers and high customer concentration risk might affect the company’s financials. The company faces stiff competition from players like Bluelinx Holdings Inc. , Builders FirstSource Inc. and Louisiana-Pacific Corp. .

Zacks Consensus Estimates for the fiscal years 2011 and 2012 stand at 27 cents and $1.08, representing a year-over-year decline of 64.47% and growth of 299.07%, respectively.

Thus, we downgrade the stock from Neutral to an Underperform recommendation.   

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