Universal Forest Products (UFPI)

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Key Statistics

Enterprise Value = $1.83 billion

Operating Income = $196 million

EV/Operating Income = 9.33x

Price/Revenue = .36x

Earnings Yield = 9%

Debt/Equity = 20%

The Company

Universal Forest Products (UFPI) designs, manufactures and markets wood products around the world. They supply lumber directly, while also supplying lumber products for everything from wooden crates to wood products used in manufactured homes and RV’s. While they have a global footprint, their focus is in the United States. A major source of business is their supply of lumber to Home Depot, which accounted for 19% of their total revenue in 2017.

UFPI grows organically with the economy. Growth over the last ten years has been steady with the US economic expansion.

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Market sentiment is against this stock despite its rapid growth over the last few years. The stock is down 29% over the previous year while earnings in the most recent quarter were up 20% during the last year. Fear is being driven by the slowdown in the US real estate market and current market fears that the US economy is headed for a recession. The housing market has slowed down recently, bringing up fresh doubts about the lumber business and fueling concerns that UFPI’s earnings are at a cyclical peak.

My Take

This is a cyclical stock, and I am buying it based on my belief that the US will not go into recession over the next year. The short end of the yield curve inverted, the long end hasn’t yet, and we typically have 2 years after inversion in the long end before we actually have a recession. What’s a more reliable forecasting tool? Mr. Market’s freak out over the last couple of months, or the yield curve?

Worries over housing are actually worries over a redux of the 2008 housing meltdown. Even if we do experience a slowdown in housing, I don’t think it will be anything like that meltdown. The quality of borrowers is significantly better than it was last decade. Credit scores for first-time homebuyers, for instance, are up significantly over the mid-2000s euphoric Red bull and Vodka soaked housing bubble that left the US in financial ruin. I also think there is plenty of pent-up demand for housing from Millennials. Mortgage debt service payments as a percent of disposable income are also at the lowest levels since we started tracking it. In short: I think worries about a housing slowdown are overblown.

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The stock has been punished in the previous year over macro worries that aren’t showing up in the actual results from the business. The most recent Q3 earnings were up 20% over the last year and profits were up 14.7% while the stock is down 29%. What is more real? What is more reliable? The actual performance of the business or the market’s speculation about macroeconomics? I know where I would prefer to place my bets.

This is a bucket I am going to focus more on. Namely, stocks that are getting punished over macro worries that aren’t actually showing up in the real performance of the business. It seems like an area that is ripe for mispricing.

From a relative valuation standpoint, UFPI’s valuation ratios compare favorably to its history and the industry averages. On a Price/Revenue basis, UFPI currently trades at 36% of revenue, compared to an industry average of 115%. UFPI currently has a P/E of 11, compared to an industry average of 17. Over the last 5 years, UFPI’s average P/E has been 19.5. A return to these levels would be an increase of 77%. On an EV/EBIT basis, UFPI currently trades at 9.33x compared to a 5-year average of 12.65.

Overall, UFPI currently trades at an attractive valuation, and it has been punished over macro worries that aren’t showing up in the actual business. For this reason, I have purchased a position.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.