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We have recently upgraded Universal Forest Products, Inc. (UFPI - Analyst Report) from Underperform to a Neutral recommendation, anticipating its performance to be in line with the broader market.

Why the Upgrade?

Universal Forest Products is a large player in the lumber supply chain consuming approximately 7% of the North American softwood lumber production annually. The stock has grown roughly 9% year-to-date and is quite likely to perform well in the quarters ahead.

If we steal a look into the company’s first quarter 2013 results, we find that the Universal Forest provided upbeat results for the quarter. Earnings per share came in at 26 cents, up 24% year over year and way above the Zacks Consensus Estimate of one cent. Revenue grew 21% on the back of very fine performance in its five market segments. Unit sales increased 2% while prices rose by 19% in the quarter.  

Management of Universal Forest looks forward to improving its top-line growth through additions of new customers and products to its portfolio. The company aims to be a $3 billion company on the back of roughly a 15% improvement in productivity and a three percentage point improvement in profitability by 2014.

We believe Universal Forest is progressing well towards achieving its set targets. Also, expansion through meaningful acquisitions has been the company’s favoured mode of forging ahead. Of the many acquisitions it has made, the recently acquired Nepa Pallet and Custom Caseworks assets have served to strengthen the company’s foothold in Northwest United States and industrial business, respectively.

Universal Forest has also been rewarding its shareholders through regular dividend payments with increases at regular intervals. Recently, the company received its Board of Directors’ approval for a semi-annual dividend payment to its shareholders.

All these positives forced us to upgrade our view on Universal Forest, which was restricted to a Neutral recommendation due to some near-term concerns surrounding the stock. Rising costs have been a major hurdle for the company; cost of goods sold increased 23.3% while selling, general and administrative rose by 5.4% year over year in the first quarter of 2013.

Other Stocks to Consider

Universal Forest currently has a market capitalization of $776 million. Other stocks to watch out for in the industry are Louisiana-Pacific Corp. (LPX - Snapshot Report), Plum Creek Timber Co. Inc. (PCL - Analyst Report) and Potlatch Corporation (PCH - Snapshot Report), each holding a Zacks Rank #1 (Strong Buy).
 

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