2023-04-13 09:50:24 ET
Summary
- UFP Industries has been able to very successfully capitalize on the growing demand for its products and showcase why it is a company to look out for.
- Despite the last few years having some volatile commodity prices affecting margins, UFPI has been able to divert and generate impressive cash flows in 2022.
- The company has a strong balance sheet and remains in a good market position which makes me able to rate them a buy right now.
Investment Summary
UFP Industries Inc. (UFPI), a US-based holding company, has been in the business of supplying wood, wood composite, and other products to various industries for a considerable time now. Through its three segments - Industrial, Site-Built, and Retail, UFP Industries have been consistently providing a quality product which has netted them impressive growth over the last several years.
Stock Chart (Seeking Alpha)
With a robust and growing portfolio of products and services, UFP Industries is well-positioned to meet the evolving needs of its customers and drive growth for the company in my opinion. As shown in the last earnings report the company had a very successful 2022 with good growth and a strong showcase of what pace they are capable of growing at. This I think underlies why the company is a stable addition to a portfolio and it deserves a buy rating because of it.
Market Overview
The advanced building products industry is poised for growth in the coming years, with a projected CAGR of around 6.8% between 2022 and 2031 according to a report by AllliedMarketResearch . In my opinion, UFPI is well-positioned to capitalize on this demand and deliver strong growth. The report really underlines the demand that is still placed on the industry to continue pushing out supplies.
Market Overview (AlliedResearch)
While the US experienced a slight slowdown in building permits compared to last year, the demand for affordable housing remains strong. UFPI is well-positioned to benefit from this demand as they supply wood and other building materials to the industry. They have been able to grow sales at an impressive pace and continue to prove why they are a company to count on.
Of course, there may be some challenges ahead as the economy slows down, but I believe that UFPI is well-prepared to weather any storms. With a strong history of growth and a focus on delivering quality products to their customers, I think that UFPI is a solid choice for investors looking to tap into the growth potential of the building products industry.
Risks
One of the significant risks that can have a direct impact on the industry's growth and profitability is the volatility of raw material prices. Changes in raw material prices can leave building product manufacturers and suppliers struggling to maintain profitability, which can then have a trickle-down effect on other companies operating in the industry.
The industry is also susceptible to economic cycles and trends. In times of economic downturn, people and businesses may cut down their spending on construction and renovation projects, leading to decreased demand for building products. This trend can put pressure on companies to reduce their prices, leading to a reduction in profit margins.
Free Cash Flow History (Seeking Alpha)
Specifically with UFPI, I think the inconsistent cash flows over the last few years might be a sign of some trouble. The last couple of years has put a lot of pressure on companies and with UFP Industries this meant negative levered cash flows in 2021. The trend seems to have reversed and they have had their strongest levered cash flows ever. But I will be looking if they are able to do this consistently also.
Financials
Looking at the balance sheet for December 2022 the company's current assets have increased from $2.07 billion to $2.26 billion, which is a good sign for the company's short-term financial health. Additionally, its current liabilities have decreased from $776 million to $611 million, indicating that the company is managing its short-term debts well. I think that the increase in cash flows has significantly been able to aid the company in managing these liabilities and given them a much more flexible financial state to be in. This is very important to me as it often means a company can efficiently make investments and stay ahead of the competition.
Balance Sheet (Earnings Report)
However, the company's long-term debt has stayed around $275 million, which suggests that the company may need to focus on paying off its long-term debts in the future. I would have preferred to see a more significant decrease in long-term debts as a way to capitalize on the cash flows that were generated. But looking on the bright side, the company now has enough cash on hand to pay down the debt two times over as it was around $560 million in the last report. I think the cash position further highlights why the company is in a strong position right now and able to if necessary make important investments.
Valuation & Wrap Up
UFPI is a growing company that has an excellent balance sheet to leverage and gain more market share. I think there is a strong likelihood of share buybacks beginning to happen if the company can keep up these levels of cash flow. This would greatly boost the value for shareholders, even more than the around 1.2% dividend yield that is present right now.
Looking at the valuation the company is trading at quite a discount to the industry. With the forward p/e around 10 compared to the industries 16. One noteworthy thing is the p/e increase, which of course is because of estimates being the company won't be able to have the same growth as previously. But I still think the valuation seems too good not to take advantage of.
Return On Capital (Seeking Alpha)
Apart from the p/e being very low, the company has been able to have a great ROC of around 21%. This in my opinion is a big bonus as it just means the company is better at handling and investing in itself.
All in all, I think the company offers great exposure to an industry that will continue seeing demand. But the best part might be the low valuation and strong balance sheet from the company. This all leads me to rate the company a buy right now.
For further details see:
UFP Industries Is A Stable Addition