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Universal Forest Poised on Inorganic Growth, Runs Risks

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We issued an updated research report on Universal Forest Products Inc. (UFPI - Free Report) on Dec 6, 2016. The company engineers, manufactures, treats, distributes and installs lumber, composite wood, plastic and other building products. It currently has a market capitalization of approximately $2.1 billion.

After the release of third-quarter 2016 results on Oct 18, shares of Universal Forest Products yielded a return of 7.2%, outperforming the return of 2.5% by the Zacks categorized Building Products Wood industry.

We believe that Universal Forest is working diligently to improve its products and services to tap new market opportunities. In the nine months ended Sep 2016, the company’s new product sales grew 16% year over year while in the years ahead, the company anticipates healthy sales growth from its newly introduced decorators products.

Regarding inorganic growth, Universal Forest is set to leverage benefits from its acquired assets of Idaho Western, Inc. (Jun 2016). In Sep 2016, the company acquired a custom merchandising solutions provider, idX Corp. While the company does not expect any significant impact of idX Corp. acquisition on its 2016 results, it predicts the acquired assets to generate approximately $25−$28 million in earnings before interest, tax, depreciation and amortization and incur roughly $6 million in depreciation and amortization expenses in 2017.

Recently, Universal Forest acquired all the outstanding shares of the Australian wood packaging and alternative material products manufacturer, The UBEECO Group Pty. Ltd. This acquisition will boost the company’s existing industrial packaging businesses in the country. Earlier in 2015, the company acquired Australia-based Integra Packaging Proprietary, Ltd., a wood speciality packaging products manufacturer and provider of on-site packaging services.

In addition, we believe Universal Forest is well positioned to reap benefits from the strengthening demand in the U.S. construction market. For 2016, the company expects an improvement in the top line, backed by addition of customers and products to its portfolio. Also, enhancement of operating margin remains the company’s primary area of focus.

Despite the solid near- and long-term growth potential, Universal Forest is exposed to risks arising from near-term headwinds including adverse foreign currency movements, geopolitical issues and stiff competition. Also, rising expenses have been a major issue for the company. It has no control over the costs and selling prices of lumber products, which are dependent on factors like government policies, environmental regulations, weather conditions, economic conditions and natural disasters. In the first nine months of 2016, the company’s costs of goods sold increased 5.1% while operating expenses grew 12.6% year over year.

Universal Forest Products currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the industry include Norbord, Inc. , Rayonier Inc. (RYN - Free Report) and Trex Company, Inc. (TREX - Free Report) . While Norbord and Rayonier sport a Zacks Rank #1 (Strong Buy), Trex Company carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Norbord has an average positive earnings surprise of 99.98% for the last four quarters. Its earnings estimates for 2016 and 2017 have been revised upward over the last 60 days.

Rayonier reported better-than-expected results in the last four quarters, with a positive average earnings surprise of 83.78%. Also, bottom-line expectations for 2016 have improved over the past 60 days.

Trex Company’ earnings estimates for 2016 and 2017 have been revised upward over the last 60 days. Average earnings surprise for the last four quarters is a positive 13.13%.

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