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Will Acquisitions Aid Universal Forest's (UFPI) Q3 Earnings?

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Universal Forest Products Inc. (UFPI - Free Report) is set to report third-quarter 2018 results on Oct 16, after the closing bell. The company has been delivering improved earnings and revenues, courtesy of healthy performances across the board. Notably, it came up with record sales and earnings in the second quarter for the 12th time in a row.

Shares of Universal Forest have outperformed its industry over a year. Its shares have declined 1% compared with the industry’s fall of 16.1% in the said period. Meanwhile, earnings estimates for the to-be-reported quarter as well as current year have remained stable over the past 60 days.

Let’s See How Things are Shaping Up for This Announcement

Acquisitions have been Universal Forest's preferred mode of solidifying its product portfolio and leveraging new business opportunities. In the second quarter of 2018, acquisitions contributed 1% to overall gross sales, while 3% to unit growth in Industrial business. Also, acquisitions contributed approximately $2 million to gross profit. We expect the company’s inorganic moves to contribute to third-quarter results as well.

In June 2018, the company completed the buyout of North American Container Corporation. This acquisition is anticipated to fortify its product portfolio and customer base by bringing corrugated, steel and hardwood packaging solutions under one roof, as well as enabling it to penetrate into growth markets and improve its technological expertise.

Apart from the strong inorganic moves, the company is poised to benefit from positive housing market fundamentals, along with the rising demand for repair and remodeling activities in the quarters ahead. Universal Forest’s continuous efforts to introduce new products will also likely give a boost to its performance. During the last reported quarter, organic unit growth was about 5%, backed by 400 new customers, 122 locations of existing customers and $7 million of new product sales growth.

The company aims to grow sales by roughly 4-6% over the long term. This improvement is anticipated to be more than positive GDP growth. New product sales are anticipated to constitute at least 10% of total sales, while earnings before interest, tax, depreciation and amortization growth will likely exceed unit-sales improvement.

However, higher transportation costs brought about a reduction in margins during the second quarter. Reliability and delivery issues of rail carriers, shortage of trucks and flatbeds, together with higher prices of fuel led to the increase in costs. In the second quarter, cost of sales grew 22.1% year over year due to effects of the said factors. Also, operating margin contracted 40 bps to 4.5%.

Universal Forest’s businesses are directly influenced by the U.S. housing market. Any unpleasant situation will lead to an unfavorable impact on the company’s operations. Rising interest/mortgage rates have been much of a concern. Nonetheless, low unemployment and increasing wages are somewhat offsetting those headwinds.

Outlook & Earnings Trends

The Zacks Consensus Estimate calls for Universal Forest’s Q3 revenues to jump 13.7% to $1.2 billion. Meanwhile, the company’s full-year revenues are projected to reach $4.54 billion, which would mark a 15.2% climb from 2017 level.

At the other end of the income statement, its adjusted quarterly earnings are expected to soar 36.4% to $0.75 per share. Universal Forest’s full-year EPS is expected to grow 39.1% to touch $2.56.

Here is What Our Quantitative Model Predicts:

Our proven model shows that Universal Forest Products is unlikely to beat on earnings in the to-be-reported quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen.

Earnings ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, is 0.00%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Universal Forest Products currently has a Zacks Rank #3, which increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of earnings beat.

Meanwhile, we caution against stocks with a Zacks Rank #4 and 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.
You can see the complete list of today’s Zacks #1 Rank stocks here.

Stocks to Consider

Here are some companies in the Zacks Construction sector, which according to our model, have the right combination of elements to post an earnings beat in their respective quarters to be reported.

PulteGroup, Inc. (PHM - Free Report) has an Earnings ESP of +6.88% and a Zacks Rank #3. The company is scheduled to report quarterly results on Oct 23.

KBR, Inc. (KBR - Free Report) has an Earnings ESP of +0.65% and carries a Zacks Rank #3. The company is expected to report quarterly results on Oct 30.

Jacobs Engineering Group Inc. (JEC - Free Report) has an Earnings ESP of +5.25% and a Zacks Rank #3. The company is likely to report quarterly numbers on Nov 20.

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