Universal Forest Down to Neutral

We recently downgraded our recommendation on Universal Forest Products, Inc. (UFPI) from Outperform to Neutral, anticipating the company to perform in line with the broader market.

Why Neutral?

We find Universal Forest well positioned in the lumber supply chain, having provided a solid 27.6% year-to-date return. The company’s focus on expansion through development of the industrial business, entry into markets without adding capacities and accretive acquisitions have reaped benefits in the past and are also expected to be positives going forward.

In the last quarter of 2013, Universal Forest added SE Panel assets to its portfolio. The acquired business will enable the company to gain easy access into concrete forming and construction industries of the southeastern region of the United States.

Besides business expansion, Universal Forest believes in rewarding its shareholders well through dividend payments, coupled with regular increases. The last quarter of 2013 witnessed a 5% hike in the annual dividend rate. The company also did well financially in its third-quarter 2013, as is evident from 71 cents earnings per share, which more than doubled year over year. Revenue grew 22%.

Going forward, Universal Forest anticipates boosting its top-line growth by adding new customers and products to its portfolio. By 2017, the company aims to generate roughly $3 billion sales and operating margins at normal historical levels.

Anticipating that the company’s share price already discounts the impact of the positives discussed above, we have lowered our recommendation on Universal Forest from Outperform to Neutral. Also, risks arising from significant volatility in the cost of commodity lumber products from primary producers, customer concentration, competition, and general market conditions might affect the company’s growth momentum.

Other Stocks to Consider

Universal Forest currently has a market capitalization of $1.03 billion and carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the industry include CaesarStone Sdot-Yam Ltd. (CSTE), Potlatch Corp. (PCH) and Masco Corp. (MAS). While Caesar Stone carries a Zacks Rank #1 (Strong Buy), both Potlatch and Masco hold a Zacks Rank #2 (Buy).

Read the Full Research Report on UFPI
Read the Full Research Report on CSTE
Read the Full Research Report on MAS
Read the Full Research Report on PCH


Zacks Investment Research