UFPI downgraded to Underperform

We recently downgraded our rating for Universal Forest Products Inc. (UFPI), a manufacturer and distributor of lumber, composite wood, plastic and other building products, from Neutral to Underperform. We downgrade based on a host of factors including weak second quarter results, huge dependence on general market conditions and growth in end markets, volatility in cost of lumber products, and enormous customer concentration.

Second Quarter Results

Universal Forest Products Inc. reported disappointing results for the second quarter of 2010 with its net income falling despite a healthy top line growth. Net income slipped 14.9% year over year to $13.7 million or 70 cents per share compared with $16.1 million or 83 cents per share in the second quarter of 2009, primarily due to higher costs. Earnings per share also fell short of the Zacks Consensus Estimate of 89 cents.

Net sales in the second quarter 2010 increased 24% year over year to $638.6 million, primarily based on healthy growth in all the markets served.

Downgraded to Underperform

Universal Forest Products engineers, manufacturers, treats, distributes, and installs lumber, composite wood, plastic and other building products for the do-it-yourself (DIY), site-built construction (homebuilders), manufactured housing, and industrial markets. Though the company stands comfortably positioned to expand into new markets, we see little share-driving catalysts, going forward.

Moreover, Universal’s excessive dependence on general market conditions and growth in end markets increase its top line risks in the event of any adverse conditions. The recent economic crisis hurt the company badly as consumer spending for large repair/remodel projects declined significantly. Besides, volatility in the cost of lumber products from primary producers and high customer concentration risk might affect the company’s financials.

The company faces stiff competition from players like Bluelinx Holdings Inc. (BXC), Builders FirstSource Inc. (BLDR) and Louisiana-Pacific Corp. (LPX). Thus, we downgrade the stock from Neutral to an Underperform recommendation.

UNIVL FST PRODS (UFPI): Free Stock Analysis Report

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