2023-05-31 15:40:10 ET
Summary
- UFP Industries, a producer of wood and alternative wood products, has a solid history of growth, a pristine balance sheet, and plans to grow.
- Risks include an uncertain economy that makes investing uncertain in the near term.
- Several metrics indicate the stock is fairly priced for long-term investors, but short-term investors may wish to wait for more certainty.
UFP Industries ( UFPI ) subsidiaries produce a variety of wood and alternative wood products in three markets : Construction, packaging, and retail.
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Construction provides building products to builders of single-family homes, multi-family housing small offices, light commercial facilities, and agricultural buildings on site. It also supplies products of modular and HUD-approved housing. Other products include those for RVs and cargo trailers.
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Packaging produces wood pallets, custom skids, crates, boxes, cut lumber, corrugated cardboard, and labels.
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Retail supplies value-added building and home products for retailers, both for the DIY consumer and the professional contractor. Its flagship brand is Deckorators , offering composite decking.
According to the Annual Report , UFP estimates that it produces 45% of all roof trusses used in factory-built housing in the United States, an impressive number. However, manufactured housing is currently down 29% based on February shipments, according to the recent earnings call .
On the brighter side, Deckorators continues to be solid. The unit is bringing more products to market using mineral-based technologies.
Site Built construction was a "pleasant surprise, despite new home sales being down from 2022. March showed a rebound, and current order files have improved as well."
Despite the downturn seen this past quarter, the company has had good success over the years increasing revenue.
There was plenty of talk during the earnings call about declining profit margins, but overall these have improved historically.
UFP has a long history of returning dividends to investors. There was a major drop during the pandemic, but it has since recovered. The current yield is 1.24%
Risks: Uncertain Times
Given interest rate changes, federal debt levels, and resiliency of consumers, CEO Matt Missad quoted MGK regarding the company's outlook during the call:
All I know is I don't know nothing, people talk and they don't say nothing.
That is about as honest and straightforward as anyone can be about the current environment.
Lumber prices have an effect on any wood products company. The company is diversifying with its "mineral-based technologies", but most of its products are still made of wood. The company saw a 26% reduction in sales last quarter. This was due to a 20% decline in selling prices, primarily caused by the decline in lumber prices.
The situation has not improved since the earnings call. Both Home Depot and Lowe's have cut sales outlooks due to falling lumber prices and unfavorable weather. Home Depot and Lowe's are the company's two largest customers , accounting for 15% and 11% of total net sales respectively for 2022.
Going Forward Nevertheless
Instead of focusing on the uncertain macro environment, Missad talked about what his company is doing going forward. The company grows by acquisitions, and the company's acquisition team "is reviewing several potential transactions." In response to a question from analyst Ketan Mamtora, Missad said:
I think each one of the business units has identified targets that they feel are very important to their future growth. And that's creating what I think is a terrific competition for capital, trying to find the transactions that make the most sense, that can bring the biggest impact over time..I don't think there's a shortage of opportunities, Ketan, our challenge is making sure that we maintain our fiscal conservatism as we evaluate these opportunities.
The company's conservative balance sheet can certainly support more acquisitions. Missad touts $145 million in surplus cash in excess of debt in the call. The company's current assets are greater than total liabilities.
Valuation
The company bought back 550,000 shares at an average cost of $78.45, according to the recent earnings call. The share price as of this writing is $78.22.
Having said that, the low share price handle hovered in the $75-76 range in March and April.
In a different perspective, the EV to EBITDA Ratio is near historic lows.
Despite the rise in stock price, the P/E Ratio continues to drop.
Summary
The company is solid. It has a long history of growth. It has a pristine balance sheet, one that allows the company to make further acquisitions. It has a number of potential acquisitions it can make in the near future, and given their history, most likely will acquire more companies in coming months and years. The long-term prospects look good.
The risks come in an unknown future with an uncertain economy in the near term. Lumber prices continue to play havoc with margins. It is no wonder that Missad says, "I don't know nothing."
The valuation is fairly priced by several metrics. For the long-term investor, the current price could be a good place to start a position. For this reason, I put a buy on the stock. It could well be bought for $76 in a few days.
For further details see:
UFP Industries: Staying Steady Even When You 'Don't Know Nothing'