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UFP Industries (NASDAQ:UFPI) has been a strong long-term funding for long-term holders. The diversified holding firm has seen strong development over the previous decade, accompanied by secure and increasing margins, whereas sustaining stability sheet integrity.
This has served long-term buyers nicely, as present cheap valuations translate into an honest long-term prospect for buyers.
Worth Added Merchandise
UFP has been based again in 1955 in Grand Rapids. The corporate employs almost 16,000 staff and operates over 200 amenities throughout the globe, mixed producing over $7 billion in gross sales.
These gross sales are generated throughout three divisions, the most important of which is UFP Retail States, accountable for almost $3 billion, or 40% of gross sales. This serves huge field, independents and shopping for co-ops with this enterprise largely being comprised out of the ProWood Group, out of doors decking and fencing options.
That is complemented by a $2.2 billion UP Development enterprise which deal with website builts, manufacturing facility constructed and concrete forming options, amongst others. The third is a $1.8 billion UFP Packaging enterprise which focuses on structural packaging options, PalletOne and different packing options, all complemented by a smaller worldwide phase.
General, the corporate is for a couple of third uncovered commodity like markets, with the remaining being value-added merchandise. The excessive publicity of picket purposes makes that risky lumber costs can have an effect on the enterprise, but margins reported previously couple of years increase no resemblance to lumber costs, though they work by way of in reported gross sales, after all.
A Worth Creator
A disciplined capital strategy and bolt-on dealmaking technique have meant that UFP has seen strong development. Over the previous decade, the corporate has grown gross sales from about $3 billion in 2015, to a peak close to $10 billion in 2022, as a reversal of lumber costs despatched gross sales all the way down to about $7 billion, or perhaps a bit much less, right here. Mid-single digit working margins rose in direction of 10% of gross sales alongside the height, however have now stabilized at excessive single digits.
Regardless of the pullback in response to the outcomes, the corporate has seen strong earnings development on the again of the mix of topline and margin development, bolstering the underside line. This made {that a} $20 inventory in 2015, has now risen to $113 (after peaking at $136 over that previous summer season).
Efficiency Cools
In February of this yr, the corporate posted a 25% fall in 2023 gross sales to $7.2 billion, largely pushed by decrease pricing because the fiscal yr counted one working week much less as nicely. There was some generic quantity strain as nicely, as costs falling by 16% was complemented by a 9% fall in volumes (of which solely a tiny half might be contributed to a working week much less within the yr 2023).
The corporate managed margins in a good means, with EBITDA down an identical 26% to $810 million, as diluted earnings per share fell by 26% as nicely to $8.07 per share.
Income declines have been reported throughout all divisions, but this was all because of a reversal of lumber costs, which fell after they rose spectacularly within the post-pandemic period (and boosted reported gross sales numbers these years, notably in 2022).
The corporate anticipated larger normalization of lumber costs throughout 2024, with demand in finish markets seen comparatively flattish, though that the second half of 2024 was anticipated to be stronger than the primary half.
Declines Degree Off
In April, UFP posted a ten% fall in first quarter gross sales to $1.64 billion, with pricing accountable for a 9% income decline, and volumes down a %. Principally amidst increased curiosity revenue obtained on money balances, reported earnings have been down simply two pennies to $1.96 per share.
Whereas the begin to the yr was comparatively sound, it was the decreased expectations for rate of interest cuts which meant that the corporate voiced a bit extra cautious tone on the rest of the yr, though that the second half of the yr needs to be anticipated comparatively stronger.
In July, UFP posted a 7% fall in second quarter gross sales to $1.90 billion, with decrease costs once more accountable for the overwhelming majority of worth declines, whereas volumes have been down a %. Diluted earnings have been down thirty-one cents to $2.05 per share, amidst some real margin strain being witnessed together with the topline gross sales declines.
The Valuation Perspective
With earnings thus far this yr down thirty-five cents to $4.00 per share, an $8 per share quantity appears to be like like a good estimate for the yr, to be aided by a restoration within the second half of the yr, because the fourth quarter is often softer.
Promising is that the stability sheet could be very resilient; in actual fact, outright sturdy. Web money holdings are available in round $800 million and based mostly on a share depend of about 60 million shares, that is the same as a considerable $13 per share.
At a present worth of $113 per share, that suggests that working property are valued round $100 per share, which in its flip means that shares commerce at a really cheap 12-13 instances earnings a number of. The corporate has purchased again over $160 million in inventory over the previous yr, which runs at a buyback fee of 2-3% per yr. Dividends of simply $0.33 per share (on a quarterly foundation), symbolize a low payout ratio and dividend yield, even after this dividend was hiked by ten % earlier this yr.
This implies that the corporate has large firepower to spend extra on buybacks, dividends, however furthermore acquisitions, supplied it may discover the best acquisition targets. Furthermore, the corporate ought to be capable to profit from decrease rates of interest, driving a restoration within the housing market, which nonetheless has to return to fruition and present up in the actual outcomes.
Whereas the corporate is considerably of a diversified animal, because it targets shopper and enterprise markets, whereas specializing in commodity-like and value-added merchandise on the similar time, the general outcomes are spectacular.
Regardless of cyclicality and publicity to risky commodity markets, the corporate has been posting secure margins, and has demonstrated on sturdy development in recent times. Furthermore, the corporate mitigates a lot of those dangers by sustaining a robust stability sheet, together with an enormous internet money place, as shares commerce at non-demanding valuations, thereby mitigating some dangers to buyers.
This makes that whereas no nice speedy outcomes needs to be anticipated, amidst an absence of apparent triggers on the horizon past rate of interest cuts, is that the earnings yield is spectacular and will over time stream by way of to buyers. These would possibly doubtlessly be rewarded by a number of growth as nicely. Amidst all this, I’m turning impressed with the enterprise, trying to become involved on small dips from right here.
