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Universal Forest Products (UFPI) Q3 Earnings Lag, Shares Down

Shares of Universal Forest Products, Inc. UFPI have declined more than 15% in the last three trading sessions after third-quarter 2018 earnings release on Oct 16, wherein earnings missed the Zacks Consensus Estimate while sales beat the same. In fact, its shares declined 17.7% in the past month, comparing unfavorably with the industry’s fall of 17.3%.




Universal Forest Products reported net earnings of 66 cents per share third-quarter, missing the consensus mark by 12%. That said, net sales of $1,212.7 million surpassed analysts’ expectation of $1,201 million by 1%.

Universal Forest Products’ top line grew 15% on a year-over-year basis. Also, the bottom line increased 20% year over year. Quarterly earnings and revenue improvement were propelled by healthy segmental contribution. Notably, the company came up with record sales and earnings for the 13th time in a row.

Notably, Universal Forest Products’  segmental sales sum up to total gross sales. In the third quarter, gross sales totaled $1,233.7 million, rising 15% from the year-ago period. Roughly 7% of the year-over-year growth was led by unit sales improvement — including 5% from organic sales and 2% from acquisitions. Additionally, higher prices contributed 8%.

Universal Forest Products, Inc. Price, Consensus and EPS Surprise

Universal Forest Products, Inc. Price, Consensus and EPS Surprise | Universal Forest Products, Inc. Quote

A brief snapshot of end-market gross sales has been provided below:

Retail Building Materials (35.9% of third-quarter gross sales): The segment’s sales grew roughly 13% year over year to $443 million. Unit sales accounted for 4% (all organic sales) and favorable pricing contributed 9% to sales growth.

Industrial (34.8%): The segment’s sales totaled $429 million, reflecting growth of 15% from the year-ago period. Unit sales grew 8% and favorable pricing contributed 7% to sales growth. Of the unit sales growth, acquisitions accounted for 5% and organic sales added roughly 3%.

Housing and Construction (29.3%): The segment’s sales of $361 million were up 17% year over year. The improvement was backed by 8% gain from favorable pricing and 9% growth in unit sales. Organic sales accounted for 9% of unit sales growth and acquisitions contributed to 1%.

Business remained strong in manufactured housing, commercial and residential construction markets, with year-over-year sales growth of 10%, 30% and 19%, respectively.

Operating Highlights

During the quarter, Universal Forest Products’ cost of sales increased 15.6% year over year to $1,054 million, representing 86.9% of net sales versus 86.3% in the year-ago quarter. Gross profit grew 9.7% year over year but fell 60 basis points (bps), as a percentage of net sales, to 13.1%.

Selling, general and administrative expenses of $102.3 million grew 10.7% year over year, representing 8.4% of net sales (down 30 bps year over year). Operating margin contracted 20 bps to 4.7%.

Balance Sheet & Cash Flow

As of the quarter end, cash and cash equivalents were $26.3 million, up from $22 million a year ago. Long-term debt increased 27.9% year over year to $186.5 million.

In the first nine months of 2018, cash flow provided by operating activities totaled $60.1 million, lower than $97.4 million recorded in the year-ago quarter. Also, the company used roughly $1.8 million for repurchasing common shares.
 
Outlook

In the quarters ahead, Universal Forest anticipates to gain from the existing product portfolio, efforts to introduce new products and initiatives undertaken to achieve better production efficiency. The company expects significant double-digit growth in its Deckorators brand, as it has already received new customer commitments for 2019.

Also, its acquisitive nature is anticipated to be advantageous. The company closed six acquisitions so far this year and has plans for more buyouts, in order to enhance its core capabilities in adjacent markets.

Zacks Rank & Stocks to Consider

Universal Forest Products currently carries a Zacks Rank #5 (Strong Sell).

Some better-ranked stocks in the Zacks Construction sector are Armstrong Flooring, Inc. AFI, Trex Company, Inc. TREX and Toll Brothers Inc. TOL, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Armstrong Flooring, Trex Company and Toll Brothers’ earnings are expected to grow 104.8%, 48.7% and 44.2%, respectively, in the current year.

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