Universal Strong Despite Downturn

July 21, 2006
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GRAND RAPIDS — The housing market may be starting to cool off in some of the hottest parts of the country, but Universal Forest Products Inc. has yet to feel the chill.

The Grand Rapids Township-based manufacturer of engineered building products just announced the results of the second quarter of 2006. While its sales are up a respectable 6 percent from the same period in 2005, profits for the quarter are up nearly 20 percent. Even in light of those numbers, investors appear to be more worried about the “housing bubble” than company executives are.

The strength of the quarter’s net income is particularly impressive when put in perspective. First, 2005 was a record year for the company. Showing marked improvement over the best year in the company’s history is a tall order. To do so, the company managed to control cost of goods, leading to a 12-percent improvement in gross profit margin. But while the company kept those expenses in check, it wasn’t selling its products for as much as before. Lumber prices were down approximately 14 percent from the same period in 2005. But an increase in value-added product sales made up for that shortcoming.

Even with a 19-percent jump in selling, general and administrative expenses, the company still posted net income of more than $27 million on sales of $827 million. A $1-million-plus reduction of miscellaneous expenses also contributed to that strength.

Although it still makes up the majority of the company’s sales, the do-it-yourself home improvement market has continued its decline in UFPI’s overall revenue mix. Although sales in that category grew slightly, they fell in proportion to other business areas, making up just 42 percent of the company’s business, compared to 44 percent in the second quarter of 2005.

The site-built construction business category, however, is on the rise. The acquisition of several subsidiaries throughout New England and the South has increased UFPI’s revenues from residential construction. And while that is an area of the economy that has been showing signs of weakening, UFPI has been protected.

“We’re reading the same reports you are, and we’re hearing the same thing from builders about the slowdown in the residential housing market. We’re just not feeling it. We’re still getting a healthy level of orders,” UFPI CEO Mike Glenn said in a conference call after the release of the financial report. “But, that said, we’re still mindful of the markets.”

Glenn pointed out that by avoiding “hot” housing markets like Phoenix, Tucson and Las Vegas, UFPI has sheltered itself from the major downturns that are likely to follow housing booms in those areas. He cited the company’s strength in the Northeast and the South, but mentioned flat performance throughout the Midwest.

The manufactured housing and industrial business segments were performing as expected, with a slight sales dip caused by decreased orders from a decline in manufactured home production. Industrial sales managed a double-digit increase in unit sales, though revenue in the category was only up 6 percent.

Year-to-date, UFPI is performing very well. The reconstruction of the Gulf Coast region led to a stronger-than-expected first quarter. For the first six months of the year, the company has enjoyed profits 35 percent higher than in the same period of its record-breaking 2005.

The company expects a strong remainder of the year, assuming that the housing market and the weather cooperate. A warm fall could extend the home-building season in New England, padding UFPI’s site-built revenue in the fourth quarter. Of course, natural disasters such as Hurricane Katrina could bring about another surge in demand for UFPI’s products. Assuming stability in its business sectors and no impediments to its acquisition strategies, UFPI is standing by its previously released forecast of 15- to 20-percent net earnings growth for 2006.

Although the company is performing well by all measures, its stock price has fallen in recent months. After the release of ground-breaking first-quarter financial results, the stock swelled to a price of over $80 per share. But in the weeks to follow, shares crept back to previous levels in the $60 range. After the announcement of the second quarter results, however, shares fell by more than 10 percent, creeping toward the 52-week low of $45.30.

Executive Chairman William B. Currie, who left the CEO desk earlier this year, commented on Wall Street’s valuation of the company during a conference call.

“We’re not very happy with the stock performance right now. We think we’re just kind of thrown in with what is happening in the markets,” said Currie, referring to analysts’ fears of volatility and potential losses in the residential housing market. “So we’re going to look very aggressively at a stock buy-back program.”

During the conference call, Glenn also alluded to some announcements that will be made at the time of the company’s next quarterly performance update. These may include an outline of the company’s next five-year strategic plan.     

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