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What Makes Trex a Better Wood Stock Than Universal Forest?
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The Zacks Building Products – Wood industry — which includes manufacturers of lumber and other wood products — has witnessed signs of recovery as the U.S. housing market rebounded this year, thanks to lower mortgage rates and a solid labor market. Also, moderating home prices and strengthening demand are adding to the bliss.
The August housing starts, which reflect a big source of demand for forestry products, jumped an impressive 12.3% from the prior month, marking the highest level since June 2007. Moreover, residential building permits — an indicator of construction activity — soared 7.7% month over month, again registering the highest growth since May 2007.
The operating backdrop is improving for the U.S. homebuilding space, and wood industry players like Universal Forest Products, Inc. (UFPI - Free Report) , Trex Company, Inc. (TREX - Free Report) , Louisiana-Pacific Corporation (LPX - Free Report) and Weyerhauser Company (WY - Free Report) . The overall industry is poised to benefit from increased government spending on infrastructure projects, and strong gains in repair and remodelling activity.
Notably, Universal Forest and Trex are the most recognized among the industry bellwethers. Let’s delve deeper into both the company’s growth and profitability measures.
Business Performance & Market Cap
Trex’s — with a market cap of $5.102 billion —strong residential and upbeat commercial business, along with manufacturing cost-saving initiatives bode well overall performance. Notably, its Trex Residential Products segment is adding to the bliss, buoyed by continued investments in product development activities, branding and marketing programs. Notably, the company expects net sales to grow approximately 25% year over year in the third quarter, backed by the above-mentioned tailwinds.
On the contrary, with a market cap of $2.43 billion, Universal Forest’s successful execution of strategic initiatives like acquisitions and innovations are certainly contributing to growth. Over the long term, Universal Forest aims to grow sales by roughly 4-6% above positive GDP growth. New product sales are anticipated to constitute at least 10% of total sales while EBITDA growth will exceed unit-sales growth. Moreover, it anticipates offering high-quality products to customers via starting new development and testing facilities.
Price Performance
In the past three-month period, Trex and Universal Forest have gained 29.4% and 10.3%, respectively, compared with the industry's 8% growth. Both the stocks have also outperformed the S&P 500 composite’s gain of 1.3% in the same period.
Analysts expect Universal Forest’s earnings to grow at a 5% rate over the next three-five years. On the contrary, Trex’s earnings are expected to grow 10% over the same time frame. Hence, Trex’s higher growth rate implies greater potential for capital appreciation.
Considering a more comprehensive earnings history, Universal Forest delivered a positive surprise in two of the last four quarters, while Trex came up with positive surprises in three of the trailing four quarters. Trex’s average earnings surprise of 3.8% is much better than Universal Forest’s 0.1%.
Hence, Trex is a clear winner in terms of long-term earnings growth expectation and surprise history. However, it is lagging behind Universal Forest in terms of prospects for the current year.
Investors’ Return & Profitability Measures
Return on Capital or ROC of Trex is 34%, while that of Universal Forest and the Wood industry is 11.9% and 3.7%, respectively. This signifies that Trex’s business generates nearly three times higher return on investment than Universal Forest.
Return on Equity or ROE in the trailing 12 months for Trex and Universal Forest is 35.9% and 14.4%, respectively. Markedly, both the companies provide higher returns to investors compared with the industry’s 6.1%.
A Look at the Stocks’ Valuation
The trailing 12-month price-to-earnings (P/E) multiple for Trex and Universal Forest is 40.06 and 15.05, respectively, compared with its industry’s 31.92. Universal Forest’ shares are cheaper than Trex.
Trailing 12-month price-to-book (P/B) multiple for Trex is 13.03 compared with 2.05 for Universal Forest. The industry’s P/B is 2.7x. This signifies that Universal Forest is undervalued compared with Trex and the industry.
Trailing 12-month price-to-sales (P/S) for Trex and Universal Forest is 7.4 and 0.55, respectively, compared with the industry’s 2.85.
After having a look at these valuation metrics, we can say that Universal Forest is the cheaper of the two stocks.
Final Verdict
With the help of the above-mentioned factors, we can come to the conclusion that Trex certainly has an edge over Universal Forest in terms of earnings growth, stock performance and valuation.
Both the companies remain optimistic about the overall industry growth trend, given solid demand, favorable job market and strength in economic fundamentals, offsetting industry woes.
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What Makes Trex a Better Wood Stock Than Universal Forest?
The Zacks Building Products – Wood industry — which includes manufacturers of lumber and other wood products — has witnessed signs of recovery as the U.S. housing market rebounded this year, thanks to lower mortgage rates and a solid labor market. Also, moderating home prices and strengthening demand are adding to the bliss.
The August housing starts, which reflect a big source of demand for forestry products, jumped an impressive 12.3% from the prior month, marking the highest level since June 2007. Moreover, residential building permits — an indicator of construction activity — soared 7.7% month over month, again registering the highest growth since May 2007.
The operating backdrop is improving for the U.S. homebuilding space, and wood industry players like Universal Forest Products, Inc. (UFPI - Free Report) , Trex Company, Inc. (TREX - Free Report) , Louisiana-Pacific Corporation (LPX - Free Report) and Weyerhauser Company (WY - Free Report) . The overall industry is poised to benefit from increased government spending on infrastructure projects, and strong gains in repair and remodelling activity.
Notably, Universal Forest and Trex are the most recognized among the industry bellwethers. Let’s delve deeper into both the company’s growth and profitability measures.
Business Performance & Market Cap
Trex’s — with a market cap of $5.102 billion —strong residential and upbeat commercial business, along with manufacturing cost-saving initiatives bode well overall performance. Notably, its Trex Residential Products segment is adding to the bliss, buoyed by continued investments in product development activities, branding and marketing programs. Notably, the company expects net sales to grow approximately 25% year over year in the third quarter, backed by the above-mentioned tailwinds.
On the contrary, with a market cap of $2.43 billion, Universal Forest’s successful execution of strategic initiatives like acquisitions and innovations are certainly contributing to growth. Over the long term, Universal Forest aims to grow sales by roughly 4-6% above positive GDP growth. New product sales are anticipated to constitute at least 10% of total sales while EBITDA growth will exceed unit-sales growth. Moreover, it anticipates offering high-quality products to customers via starting new development and testing facilities.
Price Performance
In the past three-month period, Trex and Universal Forest have gained 29.4% and 10.3%, respectively, compared with the industry's 8% growth. Both the stocks have also outperformed the S&P 500 composite’s gain of 1.3% in the same period.
When compared with the industry’s collective performance, Trex, carrying a Zacks Rank #3 (Hold), has fared better than Universal Forest, which carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Prospects & Surprise History
Analysts expect Universal Forest’s earnings to grow at a 5% rate over the next three-five years. On the contrary, Trex’s earnings are expected to grow 10% over the same time frame. Hence, Trex’s higher growth rate implies greater potential for capital appreciation.
Considering a more comprehensive earnings history, Universal Forest delivered a positive surprise in two of the last four quarters, while Trex came up with positive surprises in three of the trailing four quarters. Trex’s average earnings surprise of 3.8% is much better than Universal Forest’s 0.1%.
Hence, Trex is a clear winner in terms of long-term earnings growth expectation and surprise history. However, it is lagging behind Universal Forest in terms of prospects for the current year.
Investors’ Return & Profitability Measures
Return on Capital or ROC of Trex is 34%, while that of Universal Forest and the Wood industry is 11.9% and 3.7%, respectively. This signifies that Trex’s business generates nearly three times higher return on investment than Universal Forest.
Return on Equity or ROE in the trailing 12 months for Trex and Universal Forest is 35.9% and 14.4%, respectively. Markedly, both the companies provide higher returns to investors compared with the industry’s 6.1%.
A Look at the Stocks’ Valuation
The trailing 12-month price-to-earnings (P/E) multiple for Trex and Universal Forest is 40.06 and 15.05, respectively, compared with its industry’s 31.92. Universal Forest’ shares are cheaper than Trex.
Trailing 12-month price-to-book (P/B) multiple for Trex is 13.03 compared with 2.05 for Universal Forest. The industry’s P/B is 2.7x. This signifies that Universal Forest is undervalued compared with Trex and the industry.
Trailing 12-month price-to-sales (P/S) for Trex and Universal Forest is 7.4 and 0.55, respectively, compared with the industry’s 2.85.
After having a look at these valuation metrics, we can say that Universal Forest is the cheaper of the two stocks.
Final Verdict
With the help of the above-mentioned factors, we can come to the conclusion that Trex certainly has an edge over Universal Forest in terms of earnings growth, stock performance and valuation.
Both the companies remain optimistic about the overall industry growth trend, given solid demand, favorable job market and strength in economic fundamentals, offsetting industry woes.
Wall Street’s Next Amazon
Zacks EVP Kevin Matras believes this familiar stock has only just begun its climb to become one of the greatest investments of all time. It’s a once-in-a-generation opportunity to invest in pure genius.
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