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The Story Behind Universal Forest Products, Inc. Stock's 14% Pop

By Daniel Sparks - Jul 16, 2015 at 12:58PM

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Here's why the market is excited about Universal Forest Product's second quarter, even if revenue was lower than expected.

What: Shares of Universal Forest Products ( UFPI -0.41% ), a holding company of subsidiaries that supply wood, wood composite, and other products for retail, housing and construction, and industrial markets, jumped as much as 14.8% today.

So what: The rise in Universal Forest's stock follows the company's better-than-expected second-quarter results, reported after market close yesterday. Reporting EPS of $1.28, up 18.5% from the year-ago quarter, the company beat analysts' estimates for EPS of $1.20 by about 7%.

Though Universal Forest's reported EPS was higher than expected, its second-quarter revenue of $838.2 million was lower than the average analyst estimate for about $851 million in revenue.

CEO Matthew Missad said a decline in lumber prices was a drag on revenue. But Missad also credited an improvement in gross and operating margins as a reason for the company's solid year-over-year growth in profitability.

"These results highlight the strength of our business model, which allows us to withstand adversity in one business market as well as adverse trends in the lumber market and still grow sales and profitability," Missad said in the quarterly earnings press release. "They also highlight the strength of our growth strategies, including our focus on sales to the industrial market and on new product development."

Now what: While Universal Forest's impressive growth in its bottom line during Q2 provides evidence that its efforts to boost profitability and run a more efficient operation are paying off, today's large jump in the stock price may have already taken this reason for greater confidence fully into account. While Universal Forest certainly hasn't given investors a reason to sell, investors interested in buying the stock should be sure to do their due diligence; at more than 19 times earnings and with its EPS growing at an average annualized rate of about 15% during the past three years, Universal Forest stock definitely doesn't appear to be a screaming buy.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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