Will Double Profits Help Universal Forest?

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Construction and building materials maker Universal Forest (NAS: UFPI) saw its third-quarter profits more than double, though revenue fell. Let's take a closer look at what happened.  

The numbers speak for themselves
Despite a 2% fall in sales to $468.9 million because of a stagnant economy, the 117% rise in net income to $5.6 million was not magically produced by the forest elves.

As revenue slid, the company managed to cut raw material costs by 3% to $414.6 million. UFPI also managed to trim selling general and administration charges by a remarkable 7%. These cost savings, coupled with a stable lumber market, propped up the company's operating income by 69% to $10 million.

So where did those sales come from? Here's a segment breakdown:

Business Segment

Q3 2010

Q3 2011

Change

Portion of Total Sales 2011

Retail building materials            $222.84$210.91(5%)44%
Residential construction             $62.86$52.17(17%)1%
Commercial construction and concrete forming   $19.00$21.2212%4%
Industrial packaging and components$120.61$128.276%27%
Manufactured housing               $64.17$65.722%14%
Subtotal$489.48$478.292.3%100%
Less: sales allowances($8.9)($9.35)  
Total$480.58$468.94  

Source: S&P Capital IQ. Figures in millions.

The retail materials segment, which forms the biggest chunk of total sales, witnessed a 5% decline to $211 million. This was because of lower unit sales on the back of tepid demand from consumers.

The residential construction segment saw an even larger decline because of plant shutdowns in California and Texas since the third quarter of the previous year.

On the flip side, commercial construction sales jumped, and the industrial packaging and components segment grew a bit despite flat growth in industrial production. Manufactured housing sales grew because of increased unit sales in the distribution business despite an industrywide decline in shipments of homes during July and August. Despite these pockets of buoyancy, the company faces challenges from the broader economic environment.

Economic blues
Building products peers Builders FirstSource (NAS: BLDR) , the maker of structural building products, and Louisiana Pacific (NYS: LPX) have been in the red for the past few quarters bearing the brunt of the stagnating economy. However, like UFPI, Beacon Roofing Supply (NAS: BECN) sees a beacon of hope as its net income has remained positive for most of the past few quarters.

The S&P has proclaimed that besides media and consumer product sectors, the market for building materials and forest products is one of the weakest in the U.S.

Even according to UFPI's CEO, there is a great deal of overcapacity in the market. So it is expected that companies like Universal Forest will struggle.

The Foolish bottom line
With a weak economic outlook and an uncertain housing market, the sector as a whole should expect tepid to poor performance. UFPI has been successful in staying in the green for the past few quarters mainly by focusing on cost-cutting measures. But I'm staying away from this stock, at least for the near term.

  • To add Universal Forest to your watchlist click here.
  • To add Builder's First Source to your watchlist click here.
  • To add Louisiana Pacific Corp to your watchlist click here.
  • To add Beacon Roofing Supply to your watchlist click here.

At the time this article was published Keki Fatakia does not hold shares in any of the companies mentioned in this article. The Motley Fool owns shares of Universal Forest Products. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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