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Universal Forest's Long-Term Prospects Solid, Runs Risks

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We issued an updated research report on Universal Forest Products Inc. (UFPI - Free Report) on Jun 20. Though the company seems well positioned for long-term growth, exposure to headwinds might restrict its growth momentum in the near term.

We believe that strengthening demand in the U.S. construction market will bode well for Universal Forest Products in the long term. Sales are predicted to grow roughly 4−6% above GDP growth, including at least 10% contribution from new product sales. Also, improvement in operating margin remains a priority for the company.

Universal Forest Products expects an improvement in the top line in the near term, backed by its diversified customer-base and high-quality product portfolio. Also, the company believes in expanding its operations through meaningful acquisitions. For instance, the company acquired certain assets of Quality Hardwood Sales, LLC and completed the previously announced acquisition of Robbins Manufacturing Co in the first quarter of 2017. We believe that these acquisitions are likely to fortify the company’s position in the hardwood products market, improve its customer base and bolster sales going ahead.

In addition, the company has a sound track record of rewarding its shareholders through lucrative dividend payments (present dividend yield is 1%) and share buybacks. In the next five years, its earnings are anticipated to grow roughly 10% and increase around 12.8% in the second quarter.

Despite these positives, we believe that Universal Forest Products is exposed to risks arising from adverse foreign currency movements, geopolitical issues and stiff competition. In addition, rising costs & expenses have been an issue for the company. Notably, its costs of goods sold increased 25.2% while operating expenses grew 22.7% year over year in the first quarter. Gross margin in the quarter slid 80 basis points.

In the last three months, shares of Universal Forest Products have lost 5.87%, underperforming the gain of 4.74% recorded by the Zacks categorized Building Products Wood industry.

We believe that above-mentioned tailwinds and headwinds clearly justify the Zacks Rank #3 (Hold) of Universal Forest Products. Also, in the last 60 days, the Zacks Consensus Estimate for the stock remained stable at $5.87 for 2017 and $6.50 for 2018.

Some better-ranked stocks in the industry include Boise Cascade, L.L.C. (BCC - Free Report) , Potlatch Corporation (PCH - Free Report) and Weyerhaeuser Company (WY - Free Report) . While both Boise Cascade and Potlatch sport a Zacks Rank #1 (Strong Buy), Weyerhaeuser carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Boise Cascade pulled off an average positive earnings surprise of 114.74% over the last four quarters. Its earnings estimates for 2017 and 2018 have been revised upward over the last 60 days.

Potlatch Corporation delivered an average positive earnings surprise of 42.59%. Also, earnings estimates for 2017 and 2018 have improved over the past 60 days.

Weyerhaeuser’s earnings estimates for 2017 and 2018 have been revised upward over the last 60 days. Average earnings surprise for the last four quarters was a positive 1.28%.

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