Universal Forest Products: A Road Less Traveled

Nothing warms the cockles of an investor's heart quite like a well-run, small company with a double-digit growth rate, selling at reasonable price -- that hasn't been discovered yet by Wall Street. Universal Forest Products (symbol UFPI) fills that bill perfectly, says Elliot Schlang of Great Lakes Review. Schlang just initiated coverage of the stock, recommending that investors "gradually accumulate" shares.

With a market cap of $1.2 billion, Universal Forest boasts a price-earnings ratio of 16 on this year's estimated earnings of $4 per share. Schlang expects 13% annual earnings growth for the next three to five years. Always conservative, Schlang would prefer to see a price-earnings-to-growth (PEG) ratio of 1 or lower before slapping a "buy" on the stock. But he expects the stock price to hit $78 within the next 12 months, from the current $63.

The numbers look good. Schlang expects earnings will rise to $4.60 per share next year. Computed that way, Universal Forest's P/E is just 14. The stock sells at less than one-half times sales. Return on equity, a measure of profitability, has been an attractive 16% over the past ten years. Meanwhile, the stock flies below the radar screen. Just two analysts other than Schlang cover the stock.

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Despite its name, Universal Forest owns no forests, no raw land and no sawmills. The 50-year-old firm instead sells pressure-treated lumber, as well as "valued-added" lumber products, such as fencing, decking, lattice work, specialty wood packaging, other engineered wood components used in construction and wood-alternative products. Based in Grand Rapids, Mich., Universal Forest distributes these products through 105 locations in the U.S., Canada and Mexico to do-it-yourselfers, contractors and builders of manufactured homes. Because freight is big part of the cost of lumber products, having locations close to customers is a big plus, Schlang says.

The question mark about the stock: Lumber is a cyclical business. With housing starts slowing, will business slow, too? Schlang acknowledges the problem but says Universal Forest has taken huge strides to diminish its cyclicality, primarily by increasing its proportion of value-added products -- on which it's much easier to pass through price increases than on a commodity. Value-added products made up 53% of sales last year, compared with 26% in 1994.

Universal Forest has a long record of steady growth. Sales have risen 11 of the past 13 years and earnings have increased 12 of the past 13 years. The 31-person management team has an average tenure of more than 20 years. These and other insiders own 12% of the stock -- a good sign that their interests are aligned with other shareholders.

--Steven Goldberg