Lackluster 3Q for Universal Forest - Analyst Blog

Universal Forest Products Inc. (UFPI) reported disappointing results for the third quarter of 2010 with net income falling despite healthy top-line growth. Net income plummeted 74.3% year over year to $2.6 million, or 13 cents per share compared with $10.1 million or 51 cents per share in the third quarter of 2009. Earnings per share also fell short of the Zacks Consensus Estimate of 52 cents.

The fall in net income was due to a 9.7% increase in lumber costs during the quarter.

Revenue

Universal Forest's top line registered a 5.0% growth to reach $480.6 million versus $457.8 million in the year-ago quarter. The increase was driven by healthy growth in all the markets served, except weak results from the Do-It-Yourself/retail market.

Do-It-Yourself/retail (41.2% of third quarter total revenue) sales dipped 7.7% year over year to $197.9 million due to 10.0% fall in unit sales induced by weak demand.

Industrial packaging/components (32.9% of total revenue) sales jumped 19.3% year over year to $158.1 million. The growth represents favorable marketing conditions and the company's efforts in adding new customers and products. Unit sales improved 12% reflecting benefits from the addition of 252 new customers.

The company remains on track to expand in the concrete and non-wood packaging materials market.

Site-built construction (14.6% of total revenue) revenue in the quarter was $70.1 million, up 1.6% year over year. Unit sales dipped 4.0% due to plant closure in the third quarter of 2009, despite an 11% increase in shipments from operational plants.

Housing starts fell 6.0% from June through August 2010 versus the comparable period in 2009. The company continues to close down plants in order to achieve improved profitability and cash flows.

Manufactured housing (13.2% of total revenue) sales shot up 18.2% to $63.4 million in the quarter. Unit sales rose by 12% resulting from the company's expansionary activities.

Margins

Universal Forest's cost of goods sold represented 88.7% of total revenue in the third quarter, an increase of 380 basis points year over year attributable to higher lumber costs. This resulted in gross margin of 11.3%, reflecting a decline of 3.8% year over year.

Selling, general and administrative expenses dropped 7.6% year over year to $47.3 million, representing 9.8% of total revenue.

Balance Sheet

Exiting the third quarter, Universal Forest's cash and cash equivalents more than doubled to $58.1 million compared with $21.2 million in the second quarter of 2010. The company repaid a portion of its long-term debt (net of current portion) with the balance slipping 22.8% sequentially to $52.5 million.

Cash Flow

Cash flow from operating activities improved substantially to approximately $63.0 million in the third quarter compared with $27.9 million in the second quarter. Capital expenditure plunged 40.6% to $4.1 million. Universal Forest repurchased shares amounting to $1.4 million in the quarter.

Outlook

Universal Forest expects challenging conditions to persist throughout 2010 and thus refrained from providing any financial guidance for the year. However, it expects some improvement in 2011 and beyond with a revival in economic conditions.

According to the Home Improvement Research Institute, home improvement spending is expected to increase 1.6% in 2011 and 6%–7% in years after that.

Further, the company expects a difficult operating environment in the site-built industry going forward, and remains focused on commercial, government and turnkey projects.

Universal Forest Products engineers, manufacturers, treats, distributes, and installs lumber, composite wood, plastic and other building products. We remain cautious of the company's growth prospects in the quarter ahead, and currently maintain an Underperform recommendation on the stock, which is supported by the Zacks # 5 (Strong Sell) Rank.

 
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