Universal Forest Products Banks On Acquisitions, Costs High

Acquisitions have been an integral part of Universal Forest Products Inc.’s (NASDAQ:UFPI) portfolio enhancement strategy. Robust U.S. construction market, along with solid demand for repair and remodeling activities also bode well.

However, higher lumber prices, along with rising labor and transportation costs raise concerns for this Zacks Rank #3 (Hold) company.

Key Growth Drivers

Universal Forest Products has been following a systematic inorganic strategy to expand market reach and boost profitability, while strengthening its product portfolio.

The company acquired North American Container Corporation in June 2018. This acquisition will help strengthen its product portfolio and customer base by bringing corrugated, steel and hardwood packaging solutions under one roof. Also, the buyout will enable the company to penetrate into growth markets and improve technological expertise.

Additionally, it acquired Expert Packaging and Fontana Wood Products in April 2018, following the acquisition of Spinner Wood Products and Great Northern Lumber in the month of January. Collectively, these buyouts are likely to generate $50 million revenues annually.

Notably, acquisitions added 2% to unit sales growth during the third quarter of 2018. The company added six businesses to its portfolio during the past three quarters.

Notably, Universal Forest Products’ Zacks Consensus Estimates for 2018 EPS is expected to grow 30.4% and likely to touch $2.40. Also, EPS for the next year is pegged at $2.76, up 15.21% from a year ago.

Apart from strong inorganic moves, the company is poised to benefit from the rising demand for repair and remodeling activities in the quarters ahead.
Universal Forest Products’ continuous efforts to introduce new products will also likely give a boost to its performance. During the third quarter, organic unit growth was about 5%, backed by 90 new customers, 140 locations of existing customers and $7 million of new product sales growth.

Causes of Concern

Shares of the company have underperformed its industry in the past year, the same has lost 31.5%. Increased lumber prices, as well as labor and transportation costs are dampening the company’s performance since the past few quarters. In the past three quarters, gross margin contracted 90 basis points, given the above-mentioned headwinds. It is experiencing higher transportation costs due to a shortage of trucks and drivers during peak delivery times.

Also, the company has least control over costs and selling prices of lumber products, which are dependent on factors like government policies, environmental regulations, weather conditions, economic conditions and natural disasters.

In fact, during the third quarter, the lumber market witnessed a decline of nearly $100 per 1,000 board feet for southern yellow pine. The swing had a negative impact on various operations, which primarily focused on variable price products.

Stocks to Consider

Some better-ranked stocks in the Zacks Construction sector include KBR, Inc. (NYSE:KBR) , RPM International Inc. (NYSE:RPM) and PGT Innovations, Inc. (NYSE:PGTI) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

KBR surpassed the Zacks Consensus Estimate in each of the trailing four quarters, with the average being 9.2%

RPM has an expected earnings growth rate of 18.4% for 2018.

PGT Innovations has a projected earnings growth rate of 93.4% for the current year.

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