Universal Forest Upgraded - Analyst Blog

We recently upgraded Universal Forest Products Inc. (UFPI) from Underperform to a Neutral recommendation.

The Michigan-based company engineers, manufacturers, treats, distributes, and installs lumber, composite wood, plastic and other building products for its do-it-yourself (DIY), site-built construction (homebuilders), manufactured housing, and industrial markets.

The recent economic crisis had a drastic impact on Universal Forest's financial due to its heavy exposure to the U.S. housing market. Though slowly, things have started stabilizing, with the company being well poised to leverage from its industrial and manufactured housing businesses in the quarters to come.

In the third quarter 2010, industrial and manufactured housing businesses were the prime contributors to the company's top-line growth. However, higher cost of sales (88.7% of total revenue) due to volatile lumber prices led to weak net results (earnings of 13 cents per share) that fell 39 cents short of the Zacks Consensus.

As compared with its prime competitors, Universal Forest fared well in the third quarter financial reporting. Bluelinx Holdings Inc.(BXC) incurred a loss of 34 cents per share while Builders FirstSource Inc. (BLDR) reported a net loss of 13 cents per share.

Management expects challenging conditions to persist throughout 2010; however, it looks forward to 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 the following years.

Universal Forest's balance sheet remains strong with cash and cash equivalents nearly doubling from $21.2 million in the second quarter to $58.1 million in the third quarter of 2010. Moreover, strong cash position remains encouraging, and enables effective execution of the authorized share buyback.

Expecting further improvements in operating environment and better performance, roughly in line with the market, we upgrade our recommendation on Universal Forest from Underperform to Neutral.