Growth is a sexy little beast. As such, it can be a bit like a siren -- luring good companies into the rocks if they're not careful to plug their ears up.
With that in mind, I feel I need to applaud UniversalForest Products
For the third quarter, revenue rose just under 2%. Lumber prices didn't have much impact on the quarter, and what growth there was came from unit sales. Now, I know 2% growth seems like nothing to get excited about -- heck, they had 15% growth just a few quarters ago. But that revenue they're getting is coming with higher margins, and that's a good thing.
Gross margin improved by nearly 200 basis points in the quarter, and while some of that was given up to higher SG&A costs, operating margins still improved by 75 basis points. That, in turn, led to operating income growing about 20% and net income growing more than 30% for the quarter. At the end of the day, you can't eat revenue, but you can eat profits. So I'll take profit growth over revenue growth almost every time.
Looking at the segments, the DIY business saw revenue decline a bit, as the company continues to walk away from less-profitable business. Site-built construction did alright, and manufactured housing saw lower revenue but higher profits, as the company improved its product mix. With the industrial business, unit sales were up about 12%, and the company has added something like 1,000 new accounts since last year. In addition to adding new accounts, management has also expanded its business with large players like KB Homes
Management topped off a good quarter with solid guidance, upping the full-year earnings growth target to 22% to 27% (versus 10% to 15% a couple quarters ago). That's in contrast to lower projected sales guidance and part and parcel of the company's ongoing focus to boost margins and not overpay for acquisitions.
Much as I like this company, I'm not sure that the company can sustain a high enough growth rate to entice me to buy these shares right now. Some back-of-the-envelope work with my valuation model suggests that the company would have to grow at a mid-teens clip over the next decade to meet my margin-of-safety requirement. Maybe these guys can do it, but that's a pretty high standard for any company to achieve -- even one that's making the right moves today.
For more well-constructed Takes, build your knowledge here:
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).