A month has gone by since the last earnings report for Universal Forest Products (UFPI). Shares have lost about 3.6% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Universal Forest due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Universal Forest Products Q3 Earnings Beat, Margin Up
Universal Forest Products, Inc. reported mixed results in third-quarter 2019, wherein earnings surpassed the Zacks Consensus Estimate but revenues missed the same. This marked the third straight quarter of earnings beat, while the second consecutive quarter of lagging revenue estimates.
Despite being hurt by rising labor costs and significant fluctuations in the lumber market, the company managed to generate strong earnings on the back of solid new and value-added products growth.
The company’s earnings of 84 cents per share topped the consensus estimate of 78 cents by 7.7%. Also, the reported figure increased 27.3% from 66 cents reported in the year-ago period.
Net sales of $1.16 billion marginally missed the consensus mark of $1.18 billion and declined 4.1% on a year-over-year basis from $1.21 billion. Lower lumber prices and 11% reduction in selling prices adversely impacted gross sales.
In a bid to expand value-added offerings and market presence in Midwest and Northwest, the company acquired Hartford, Wisconsin-based Pallet USA and Bonner, and Montana-based Northwest Painting, Inc. during the third quarter.
End-Market Sales Discussion
Universal Forest Products — which shares space with Weyerhaeuser Company (WY), Armstrong Flooring, Inc. (AFI) and Trex Company, Inc. (TREX) in the Zacks Building Products - Wood industry — classifies top-line results on the basis of end-markets served. Investors should note that its end-market sales sum up to total gross sales.
Gross sales during the reported quarter came in at $1,184 million, down 4% from the year-ago period. Unit sales grew 7% year over year, of which organic sales accounted for 6% and acquisitions contributed 1%.
New product sales were up 7% year over year to $142.9 million. Mix of value-added sales, relative to commodity sales, surged 67.6% from the year-ago period.
Retail (36.9% of gross sales): Retail segment sales fell 1% year over year to $437 million during the quarter. Selling prices also dropped 11% from the prior-year quarter, offsetting the 10% increase in unit sales. The increase in unit sales was mainly attributable to strong organic growth, driven by sales of Deckorators decking and deck accessories.
Industrial (28.1%): The segment’s sales totaled $332.5 million, reflecting a decline of 6% from the year-ago period. During the quarter, unit sales increased 4% from a year ago, partially offset by 10% lower pricing. Moreover, acquisitions and organic growth contributed 2% each to unit sales growth.
Construction (35%): Sales in the segment came in at $414.4 million, down 5% year over year. A 13% decline in selling prices offset the 8% positive impact of unit sales. Unit sales in commercial, residential and manufactured housing markets rose 15%, 6%, and 1%, respectively, from the prior-year quarter.
Cost of goods sold, as a percentage of net sales, decreased 300 basis points (bps) to 83.9% from 86.9% in the year-ago quarter. Gross margin of 13.1% improved 300 bps to 16.1%.
Selling, general and administrative expenses, accounting for 10% of net sales, increased 160 bps year over year. Operating profit in the quarter improved 24% from the year-ago quarter to $70.5 million. EBITDA totaled $89.7 million, reflecting an increase of 23% year over year.
Balance Sheet & Cash Flow
At the end of the third quarter, cash and cash equivalents were $64.5 million, up from $26.3 million in the comparable year-ago period. Long-term debt and capital lease obligations totaled $162.9 million, down from $186.5 million in the year-ago period.
In the first nine months of 2019, net cash provided by operating activities totaled $198.1 million versus net cash provided in operating activities of $60 million in the comparable year-ago period.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended upward during the past month.
Currently, Universal Forest has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. It comes with little surprise Universal Forest has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.
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