Universal Forest (UFPI) Lags Q2 Earnings, Expenses Increase

Building products company, Universal Forest Products Inc. (NASDAQ:UFPI) reported disappointing results for the second quarter of 2017.Growth in the top line was offset by higher cost of sales and operating expenses. Volatility in the lumber market was a concern in the quarter. Overall, net earnings grew a meager 1% year over year.

The quarter’s earnings per share came in at $1.64, roughly 11.4% below the Zacks Consensus Estimate of $1.85. The bottom line was on par with the year-ago quarter tally.

Revenues

Net sales improved 23% year over year to $1.072 billion on the back of unit sales growth (contributing 16% to net sales increase) and higher lumber prices (contributing 7% to net sales increase). Also, the top line surpassed the Zacks Consensus Estimate of $1.04 billion by 3.1%. New products sales improved roughly 18.5% year over year to $115.9 million, driven by benefits from roughly 23 new products launches year to date.

Segmental Details: Performance in three end market-based segments, namely Retail Building Materials, Industrial, and Housing & Construction were impressive. The company’s segmental sales sum up to total gross sales. In the quarter, the company’s gross sales totaled $1,090.2 million, up 23% year over year. A brief snapshot of end-market sales has been provided below:

Retail Building Materials’ (42.1% of second-quarter gross sales) revenues of $459.1 million increased 13% year over year on the back of healthy new products sales and improved businesses from big box and independent customers. Unit sales grew 8% and selling prices went up 5% in the quarter.

Industrial sales (30.8%) were $335.9 million, increasing 47% year over year. The growth was primarily triggered by synergistic benefits from acquisition of idX Corporation (closed in Sep 2016) as well as healthy businesses from new and existing customers.

Housing and Construction sales (27.1%) were $295.2 million, up 17% year over year due to impressive businesses from residential construction, manufactured housing and commercial customers.

Margins

Universal Forest Products’ margin profile suffered from higher costs and expenses. As a percentage of revenues, the company’s cost of sales increased 130 basis points (bps) to 86.2%. Gross margin decreased 130 bps to 13.8%. Selling, general and administrative expenses were roughly $94.3 million, accounting for 8.8% of net sales.

Balance Sheet & Cash Flow

Exiting the second quarter, Universal Forest Products had cash and cash equivalents of $24.6 million, below $31 million recorded in the preceding quarter. Long-term debt declined 19% sequentially to approximately $204.8 million.

In the first six months of 2017, the company generated net cash of $15.2 million from its operating activities, below $40 million in the year-ago period. Capital spent on purchase of property, plant and equipment amounted to $34.5 million, up from $24.3 million used in the year-ago period. Shares worth $9.9 million were repurchased while dividend of $9.2 million was distributed in the quarter.

Outlook

For 2017, Universal Forest Products expects an improvement in the top line, backed by addition of customers and products to its portfolio through organic and inorganic means. Also, enhancement of operating margin remains the company’s primary area of focus.

Zacks Rank & Stocks to Consider

With a market capitalization of $1.81 billion, Universal Forest Products carries a Zacks Rank #3 (Hold). Currently, investors interested in the building products industry can consider stocks like Louisiana-Pacific Corporation (NYSE:LPX) , Weyerhaeuser Company (NYSE:WY) and Trex Company, Inc. (NYSE:TREX) . While both Louisiana-Pacific and Weyerhaeuser sport a Zacks Rank #1 (Strong Buy), Trex Company carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Louisiana-Pacific’s financial performance has been impressive, with an average positive earnings surprise of 5.39% in the last four quarters. Also, earnings estimates for 2017 have been revised upward, over the last 60 days.

Weyerhaeuser Company delivered a positive earnings surprise of 1.28% in the last four quarters. Also, earnings estimates for 2017 have been revised upward, over the last 60 days.

Trex Company pulled off an average positive earnings surprise of 7.45% in the last four quarters. Its earnings estimates for 2017 and 2018 have been revised upward, over the last 60 days.

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