Everybody knows that the market for new housing has been hot; builders such as Pulte Homes (NYSE: PHM) and Ryland Homes (NYSE: RYL) continue to put up houses about as quickly as they can. Everybody also seems to know that prices for building materials such as concrete and lumber have risen as suppliers have struggled to keep up with demand.
So why, then, are there no analysts following Universal Forest Products (Nasdaq: UFPI), a seller of lumber, composite wood, and other building materials?
I can't really answer that question for you, but I do know that the company is the largest producer of pressure-treated lumber, a major player in roof systems for manufactured housing, and a 50-year-old company with an enviable record of profitability.
For the first quarter, sales climbed about 15%, while improvements at the gross margin and operating margin level helped boost operating income by more than 39%. Including a gain-on-sale from disposing of a plant, net income rose nearly 66% over the prior year.
Although sales in the company's largest segment, the retail/do-it-yourself market, were down 1%, sales in the company's other segments were all up by double digits. The site-built construction market (generally housing) grew more than 32%, the industrial segment was up 17%, and the manufactured housing business was up more than 25%.
While the decline in the retail/DIY market is a little worrying at first blush, it wasn't entirely unexpected. The company walked away from some low-margin business and continued to try to actively diversify away from its reliance on Home Depot (NYSE: HD). To that end, sales to Home Depot were 19% of the segment total for the quarter -- the first time it's been below 20%.
Although moving away from such a powerful and popular retailer like Home Depot might seem counterproductive, Home Depot can be a tough negotiator on pricing terms when it chooses to throw around its considerable weight.
Looking ahead, management gave the kind of understated guidance that I've become accustomed to as "normal." It thinks that lumber pricing has stabilized for the time being, though at a significantly higher price than that seen just a year or two ago. What's more, while it sees the boom in new housing construction leveling off, it expects the market to stay strong in the coming years.
Given how well this stock has performed over the past couple of years, it's not unreasonable to wonder how much gas is left in the tank. The company's trailing P/E is pretty close to what would be a reasonable estimate for sustainable future earnings growth, and this is an inherently low-margin business with a fair bit of sensitivity to commodity prices. While long-term-oriented investors can probably trust Universal Forest's management to do right by them over the course of years, this stock certainly isn't for those looking to make a quick and easy buck.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
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