UFP Industries (NASDAQ:UFPI) has been a solid long-term investment for long-term holders. The diversified holding company has seen solid growth over the past decade, accompanied by stable and expanding margins, while maintaining balance sheet integrity.
This has served long-term investors well, as current reasonable valuations translate into a decent long-term prospect for investors.
Value Added Products
UFP has been founded back in 1955 in Grand Rapids. The company employs nearly 16,000 workers and operates over 200 facilities across the globe, combined generating over $7 billion in sales.
These sales are generated across three divisions, the largest of which is UFP Retail States, responsible for nearly $3 billion, or 40% of sales. This serves big box, independents and buying co-ops with this business largely being comprised out of the ProWood Group, outdoor decking and fencing solutions.
This is complemented by a $2.2 billion UP Construction business which focus on site builts, factory built and concrete forming solutions, among others. The third is a $1.8 billion UFP Packaging business which focuses on structural packaging solutions, PalletOne and other packing solutions, all complemented by a smaller international segment.
Overall, the company is for about a third exposed commodity like markets, with the rest being value-added products. The high exposure of wooden applications makes that volatile lumber prices can have an impact on the business, yet margins reported in the past couple of years boost no resemblance to lumber prices, although they work through in reported sales, of course.
A Value Creator
A disciplined capital approach and bolt-on dealmaking strategy have meant that UFP has seen solid growth. Over the past decade, the company has grown sales from about $3 billion in 2015, to a peak near $10 billion in 2022, as a reversal of lumber prices sent sales down to about $7 billion, or even a bit less, here. Mid-single digit operating margins rose towards 10% of sales along the peak, but have now stabilized at high single digits.
Despite the pullback in response to the results, the company has seen solid earnings growth on the back of the combination of topline and margin growth, bolstering the bottom line. This made that a $20 stock in 2015, has now risen to $113 (after peaking at $136 over that past summer).
Performance Cools
In February of this year, the company posted a 25% fall in 2023 sales to $7.2 billion, largely driven by lower pricing as the fiscal year counted one working week less as well. There was some generic volume pressure as well, as prices falling by 16% was complemented by a 9% fall in volumes (of which only a tiny part could be contributed to a working week less in the year 2023).
The company managed margins in a tight way, with EBITDA down a similar 26% to $810 million, as diluted earnings per share fell by 26% as well to $8.07 per share.
Revenue declines were reported across all divisions, yet this was all due to a reversal of lumber prices, which fell after they rose spectacularly in the post-pandemic era (and boosted reported sales numbers those years, notably in 2022).
The company expected greater normalization of lumber prices during 2024, with demand in end markets seen relatively flattish, although that the second half of 2024 was expected to be stronger than the first half.
Declines Level Off
In April, UFP posted a 10% fall in first quarter sales to $1.64 billion, with pricing responsible for a 9% revenue decline, and volumes down a percent. Mostly amidst higher interest income received on cash balances, reported earnings were down just two pennies to $1.96 per share.
While the start to the year was relatively sound, it was the reduced expectations for interest rate cuts which meant that the company voiced a bit more cautious tone on the remainder of the year, although that the second half of the year should be expected relatively stronger.
In July, UFP posted a 7% fall in second quarter sales to $1.90 billion, with lower prices again responsible for the vast majority of price declines, while volumes were down a percent. Diluted earnings were down thirty-one cents to $2.05 per share, amidst some genuine margin pressure being witnessed in combination with the topline sales declines.
The Valuation Perspective
With earnings so far this year down thirty-five cents to $4.00 per share, an $8 per share number looks like a fair estimate for the year, to be aided by a recovery in the second half of the year, as the fourth quarter is typically softer.
Promising is that the balance sheet is very resilient; in fact, outright strong. Net cash holdings come in around $800 million and based on a share count of about 60 million shares, that is equal to a substantial $13 per share.
At a current price of $113 per share, that implies that operating assets are valued around $100 per share, which in its turn suggests that shares trade at a very reasonable 12-13 times earnings multiple. The company has bought back over $160 million in stock over the past year, which runs at a buyback rate of 2-3% per year. Dividends of just $0.33 per share (on a quarterly basis), represent a low payout ratio and dividend yield, even after this dividend was hiked by ten percent earlier this year.
This suggests that the company has huge firepower to spend more on buybacks, dividends, but moreover acquisitions, provided it can find the right acquisition targets. Moreover, the company should be able to benefit from lower interest rates, driving a recovery in the housing market, which still has to come to fruition and show up in the real results.
While the company is somewhat of a diversified animal, as it targets consumer and business markets, while focusing on commodity-like and value-added products at the same time, the overall results are impressive.
Despite cyclicality and exposure to volatile commodity markets, the company has been posting stable margins, and has demonstrated on strong growth in recent years. Moreover, the company mitigates much of these risks by maintaining a strong balance sheet, including a huge net cash position, as shares trade at non-demanding valuations, thereby mitigating some risks to investors.
This makes that while no great immediate results should be expected, amidst a lack of obvious triggers on the horizon beyond interest rate cuts, is that the earnings yield is impressive and should over time flow through to investors. These might potentially be rewarded by multiple expansion as well. Amidst all this, I am turning impressed with the business, looking to get involved on small dips from here.
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