On Oct 22, 2014, we issued an updated research report on Universal Forest Products Inc. (UFPI). While the company seems well positioned to benefit from the recovering U.S. housing market, presence of near-term headwinds cannot be completely ruled out.
Universal Forest Products’ Housing and Construction business will gain from product additions and expansion of distribution capacities in the Manufactured Housing business, apart from favorable national housing starts in the Residential Construction business and expansion in the Commercial Construction and Concrete Forming business.
In addition, rise in home improvement spending as well as new product initiatives will boost Universal Forest's Retail Building Material business while additions of new customers and high orders from existing customers will drive the Industrial business.
Expecting such a favorable scenario to prevail in the years ahead, Universal Forest targets to achieve roughly $3 billion in sales and bring operating margins to normal historical levels by 2017. Revenues from new product sales are estimated to reach $250 million.
Also, Universal Forest Products’ commitment to reward its shareholders through dividend payments and share buybacks works in its favor. Recently, the company increased its semi-annual dividend rate by 9% to 40 cents per share from the previous rate of 21 cents. Also, exiting the third-quarter 2014, the company had 2.9 million share buyback authorizations left.
However, Universal Forest Products remains exposed to customer concentration risks and rising costs and expenses. In the last five years (2009–2013), the company’s cost of goods sold, as a percentage of revenue, has increased 320 basis points to 88.6%.
Moreover, the company faces stiff competition from a number of national and international players in the lumber and wood production industry including Bluelinx Holdings Inc. (BXC), Builders FirstSource, Inc. (BLDR) and Boise Cascade Company (BCC).
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