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Value Analysis for Universal Forest Products, Inc.

This is my first attempt at a more formal, template-based stock analysis.  I’ll be focusing only on a single stock in order to avoid getting companies mixed up and/or confused in my head.

[Brief Company Overview]

Universal Forest Products, Inc. (UFPI) is a fairly straightforward business with a narrow focus.  Their focus is on manufacturing and distributing wood and wood-alternative products.  Their website details 6 different categories of products:

  • Outdoor Living (e.g.: Decking, Railings, Fencing, Lattice, Landscaping, etc.)
  • Building Materials and Components (e.g.: Lumber, Siding, Trim, Moulding, Sheathing, other Wood Components)
  • Packaging and Industrial Materials (e.g.: Pallets, Lumber, Packaging, Supplies, etc.)
  • Concrete Forming (e.g.: For Houses & Buildings – Construction)
  • Agricultural (e.g.: Packaging, Display, Fencing)
  • Inside the Home (e.g.: Wood Fuel Pellets)

The UFPI website is also very visually appealing – not that this is a huge selling point for me.  I am a fan of aesthetics though to some extent!  The biggest takeaway here is that UFPI seems to be a company that deals with one general product (wood & wood-alternatives) and just does that one thing very well.  I view this as a positive trait as it lends itself to easier analysis, and shows that the company is not “diworseifying”, as Peter Lynch put it in his book “One Up On Wall Street”.

[Special Situation]

UFPI is not what I’d consider a special situation (e.g.: a Spinoff, Merger, etc.).

[Statistic Analysis]

Current Price / Earnings Ratio – 16.5
Price / Earnings (Trailing Twelve Months) – 16.6
Current Ratio – 2.87
Quick Ratio – 1.39
Total Cash – 44 Million ($2.14 per share; as of 2016-12)
5 Year Average Dividend Yield – 1.0%
Price / Cash Flow – 11.4
Price / Book – 1.9
5 Year Average Sales Growth – 12.20% per Quarter (as of 2016-12)
5 Year Average EPS Growth – 84.82% per Quarter (as of 2016-12)
Market Cap – 1.698B
Debt / Equity – 0.23
Interest Coverage – 29.16
5 Year Dividends Growth – 117.5% (0.40 in 2016-12 to 0.87 in 2016-12)
Price / Earnings To Growth – 1.60
Institutional Ownership – 1.40829B (82.9%)
Insider Ownership – 21.97M (1.29%)

Looking at the stats above, I would say that largely they seem to be in good shape from a strictly numerical standpoint.  The only real points of concern that I’d bring up would be:

  • EPS growth seems extremely high, to the extent that I’m nearly certain it’s not sustainable in the long run.
  • Institutional ownership percentage seems really high.  This means that this stock is under fairly heavy scrutiny from analysts, so there’s a higher probability that there’s not much “hidden” value in the company that has otherwise been overlooked.
  • Insider ownership percentage seems very low.  This doesn’t necessarily mean all that much, but it could reflect that the management in the company does not have strong confidence in the company.

Now onto the 10-year stats:

Price / Earnings:

27.0 117.6 29.4 43.7 96.2 31.4 31.4 19.1 19.4 21.0 16.6

Looks like they were severely overpriced in the past, reaching P/E ratios of over 100!  This seems rather odd for a company that specializes in wood, but I guess I should not question the market’s judgment too harshly.  Their P/E ratio is now below average for their industry – with the Industry Avg @ 23.4 and the S&P 500 Avg @ 21.9.  This is likely due to the fairly sudden spike in earnings (as seen below).  The last twelve months appears to be the first time since 2007 perhaps that their P/E ratio has dipped below the averages.  I think this is a fairly strong indicator that this stock is currently under-priced.

Earnings Per Share:

1.09 0.23 1.25 0.89 0.23 1.21 2.15 2.86 3.99 4.96 5.04

Looks like their earnings are steadily increasing with a few hiccups.  They’ve been increasing sharply as of lately (which I will look into later on in my analysis).  Their quarterly earnings record is not flawless – there are quite a few instances (like Dec. 2012, Dec. 2011, Mar. 2011, Dec. 2009, Mar. 2009, Dec. 2008, Sep. 2008, Mar. 2008) where they dipped into the negatives.  That being said, it doesn’t look like they’ve dipped into the negatives in almost 5 years now.  I’m not sure what this would be an indicator of – perhaps that it’s somewhat of a cyclical industry (I guess that’d make sense, since lumber would be needed heavily when there’s lots of new construction – but then not so much when things are stagnating).

Dividend Yield (Only 4 years + TTM)

1.05 0.79 1.15 1.20 0.85

Looking at their long-term record, I don’t see any interruptions in dividends for a long time.  This is a very positive sign!

Interest Coverage:

1.59 9.37 8.62 3.37 11.13 15.48 23.43 26.52 36.12 29.16

Their interest coverage seems to be steadily improving, indicating that they’re not really at any risk of not being able to pay their monthly interest payments.  29.16X coverage seems like a very strong margin.

Debt / Equity:

0.38 0.16 0.09 0.10 0.02 0.16 0.13 0.14 0.11 0.13 0.23
Their debt/equity seems like it’s spiked a little bit lately, but it’s still well within acceptable ranges.  I’d say anything less than 0.33 is great.

[Employee Satisfaction Analysis]

I honestly don’t have too many sources of information for employee satisfaction with regards to UFPI except for that “glassdoor” website.  It looks like UFPI has fairly mediocre reviews on the company in general (3.3 / 5), and decent ratings with regards to benefits (4.0 / 5).

Looking at a few of their competitors (like Weyerhaeuser, West Fraser Timber, Rayonier), their ratings seem right around average – maybe slightly below average.  Not to speak poorly of the industry or anything, but I can’t imagine (in general) that working for a company that does purely wood-based products would be particularly satisfying – and I wasn’t expecting to see spectacular numbers here.  The fact that they seem to fall right on the industry average is alright with me.

[Management and Headquarters Analysis]

Once again, for ratings I’m somewhat relying solely on that glassdoor website once again.  Seems that their CEO has pretty high approval ratings (81%).  This seems to be above average when comparing to the same competitors that I looked at in the previous section.  This seems like a pretty good sign.  It looks like the CEO was also named to Fortune’s “Businessperson of the Year” list in 2015, an annual ranking of the top 50 corporate leaders in the world.

Another thing that I looked at was the street view of their headquarters:
I don’t get the impression that this is overly extravagant, or that the executives of the company are wasteful.  In fact, this looks like a very modest headquarters for a company with 8000+ employees.  This is a good sign, in my opinion.

The last thing I looked at here was the management’s salaries.  In 2016, it looks like the CEO’s salary is $3,558,428 – which doesn’t seem particularly extravagant when comparing to some of the other competitor companies.  Overall, based on the three factors I’ve looked at in this section I’d say that I get a pretty decent (slightly above average) vibe from their management / headquarters.

[Sales Analysis]

I’m finding it difficult and/or impossible to determine who UFPI’s customers are.  I guess with it being a company that specializes in wood and such it’s not in the spotlight a lot.  Looking at news aggregation sites like this, it seems to be filled with fairly generic news with regards to quarterly earnings calls and (likely automated) analysis of the stock.  That being said, during their last quarterly they gave a pretty solid sign; splitting their revenue into three general categories:

Retail

$459.1 million, up 13 percent over the same period of 2016

Construction

$295.2 million, up 17 percent over the same period of 2016

Industrial

$335.9 million, up 47 percent over the same period of 2016

It seems like the sales are well diversified, without significant (e.g.: >50%) reliance on any particular category.  Overall, it seems like UFPI serves industries that aren’t at any significant risk of dying soon.  I imagine that there will always be a need for construction as buildings are torn down and built up fairly regularly, and new neighborhoods and business parks seem to pop up all the time (at least where I live!).  Looking at their published history, it also looks like they’re pretty big on expansion.  Their most recent acquisitions appear to be in 2015 in Australia, which is fairly unique in that looking at their location map all of their other facilities are in North America.  Looking at this news release, it seems like they have ambitions for additional growth in international markets.  This seems like a pretty big positive, as on a global scale it definitely appears that they’ve got a lot of room for expansion.

I’m curious too if they’re getting revenue from bigger companies like Amazon.  They talk about providing “Packaging and Industrial Materials (e.g.: Pallets, Lumber, Packaging, Supplies, etc.)” – I wonder if Amazon’s purchases things like pallets and packaging materials from UFPI.  Regardless – in general, it seems like the population is moving towards those conveniences.  Instead of going out and shopping, people are increasingly ordering things online.  In a general sense, it seems like UFPI should be able to capitalize on this shift.

One gap in my analysis here will be that I didn’t look into their competitors much, and whether or not there was a significant threat in that regard.  Looking at the statistics from above, however, it does not seem like UFPI’s “bottom line” has been affected much (at least over the past 5 years) if there is any significant competition; which is part of the reason I didn’t dig into this.

[The Story]

In this section I’ll try to create a quick blurb that I would use in the context where I might try to sell other people on the idea of buying UFPI stock.

UFPI is a company that sits in the boring industry of “wood and wood-related alternatives” with not much news, rumors, or scandal surrounding it.  To most people, I imagine this seems like a fairly large negative thing, but I think it’s actually quite the opposite.  In an industry like technology-related stocks, there are a lot of so-called “unicorns” – companies that pop up and seem to have a lot of promise, but then subsequently disappear.  There is a lot of competition with technology-related stocks to be the “next big thing”.  In UFPI’s industry, however, that is not the case.  There are no startups that specialize in making awesome “virtual reality”, “augmented reality”, “wearable”, and “smart” wood products… at least that I’m aware of.

Looking at the fundamental statistics, employee satisfaction, management, sales, etc. there are very few concerns with UFPI – in fact, it looks like UFPI’s stock has just recently gotten to the point where it’s under-priced when compared to the rest of the industry.  With UFPI having ambitions to expand more globally (with a recent move in 2015 with an expansion into Australia), it looks like UFPI has the potential for a fairly decent “upside”, as it’s still a relatively small company ($1.698B, so it’s a small-cap).  I have confidence in UFPI’s growth, which is why I’ve purchased shares in their stock.

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