An Undervalued Play on the Housing Rebound

Hot Financial Stocks To Invest In 2014

Following a multi-year decline, the housing market has been helping to fuel US economic growth in 2013, with double-digit, year-over-year increases in single-family home sales and median housing prices.

The supply of existing homes for sale is 5.2 months, or 2.21 million units, below the six-month level that most economists consider to be market equilibrium. Housing supply shortages in some areas present a challenge for prospective homebuyers, because they result in fewer homes to preview. Yet shortages are good for market dynamics, because they result in higher housing prices. The improving housing market is also a boom for building material companies.

Universal Forest Products (NASDAQ: UFPI) is one company benefiting from the rebounding housing market and home improvement business.

Universal Forest Products is a holding company that provides capital, management and administrative resources to subsidiaries that design, manufacture and market wood and wood-alternative products for building materials retailers and wholesalers, structural lumber and other products for the manufactured housing and residential construction markets, and specialty wood packaging and components and packing materials for various industries.

Universal just posted a 22 percent increase in sales and is projected to increase earnings by 77 percent in 2013. In addition, the company is still a value-based small cap relative to its peers. The company remains focused on its goals of growing sales by adding new products, new customers and new markets.

Universal Forest Products announced third quarter 2013 results, including a 22.2 percent increase in net sales to $651.8 million, up from net sales of $533.4 million in the third quarter of 2012. Net earnings for the third quarter of ! 2013 were $14.1 million, or $0.71 per diluted share, compared to net earnings of $4.2 million, or $0.21 per diluted share, for the same quarter of 2012.

Universal saw strong sales growth in each of its markets. Earnings from operations were $24.53 million compared to $8.31 million reported a year ago. Earnings before income taxes were $23.54 million compared to $7.66 million reported a year ago.

For the nine months, the company reported net sales of $1.9 billion compared to $1.5 billion reported a year ago. Net earnings attributable to controlling interest were $35 million or $1.76 per diluted share, compared to net earnings attributable to controlling interest of $26 million or $1.31 per diluted share for the same period of 2012.

Lumber prices, which have an impact on the company’s selling prices, were up in the third quarter: Overall lumber prices were up 6.9 percent; Southern Yellow Pine prices, which make up a significant portion of the company’s lumber purchases, were up 16.7 percent.

Significant volatility in the cost of commodity lumber products from primary producers also remains an impediment to growth for Universal Forest Products. An unusual rise in lumber costs will increase cost of inventory and limit margins on fixed priced lumber products, while a decrease in cost will result in lower profits by selling products which are indexed to the current lumber market.

Universal has an expansionary policy targeting development of its industrial business that is being carried out, as is the company s entry into the market without adding capacities and growth through acquisitions.

The acquisition of Nepa Pallet assets in Nov. 2012 strengthened the company’s foothold in the Northwest United States while the Custom Caseworks acquisition in Jan 2013 enabled growth of industrial business through new product offerings. Also, the addition of some assets of SE Panel in Nov. 2013 will enable the company to gain easy access to concrete forming and co! nstructio! n industries of the southeastern US.

On Oct. 8, Universal Forest Products announced it had signed an agreement, through one of its subsidiaries, to acquire some assets of SE Panel and Lumber Supply. Financial terms of the transaction have not been disclosed. The transaction is anticipated to be completed by mid-November. Universal Forest Products will gain from easy accessibility of the acquired assets to end markets served, especially the southeastern region of the US.

On Oct. 17, Universal Forest Products announced an increase of 5 percent in its annual dividend rate. The move aimed to reward the shareholders has been approved by the company’s board of directors. The new annual dividend rate has been fixed at $0.42, an increase of $0.02 over the previous rate of $0.40. The revised semi-annual dividend rate now stands at $0.21 per share and has been approved for payment on Dec. 15, 2013 to shareholders of record as on Dec. 1, 2013.

While the company has forecasted exceptional sales and earnings growth, it trades at only 0.44 times sales in the most recent quarter. Universal has a long-term debt to equity of 17 percent.

Universal is projected to have earnings per share of $1.93 in 2013 that is an increase of 77 percent from the previous year. Universal is projected to grow earnings by 56 percent to $3.00 in 2014. First Call consensus has a buy rating of 2.3 on the stock. Universal Forest Products has a 12-month price target of $75.

Greg Pugh, an income-investing expert, publishes a newsletter called Investing for Monthly Income.