Seeking Alpha: A Remodeling Recovery Has Sent Universal Forest To Multi-Year Highs

The residential and commercial construction markets still have a long way to go before they can be called "healthy", but Universal Forest Products (UFPI) is already well ahead of the curve. With strong unit growth and improved margins in the third quarter, growing expectations, and strong margin leverage to a construction recovery, I can understand the enthusiasm for this wood products company.

Although I understand, I'm not looking to join in with my own cash. Trying to forecast the pace and magnitude of residential and commercial construction recoveries is just asking to be wrong, and I won't argue with more momentum-oriented investors who look at this as a directional play on construction activity. I try to invest with a margin of safety whenever possible, though, and I think a stock like Louisiana-Pacific (LPX) may offer a little more of that right now.

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A Remodeling Recovery Has Sent Universal Forest To Multi-Year Highs

Investopedia: At Plum Creek Timber, It's Still A Waiting Game

Certain stocks just stubbornly retain value through good times and bad times - even if that means occasional periods where results aren't so good and the valuation looks too high. That's great if you're a long-term holder who already owns shares, but it can be frustrating if you're on the outside waiting for a good time to buy shares. Conditions have yet to really improve for Plum Creek Timber (NYSE:PCL), but valuation still doesn't offer much of a bargain for new investors.

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Investopedia: Louisiana-Pacific Still Bleeding

With a headline on a major internet news site proclaiming Tuesday morning that 30% of all mortgages in the U.S. are underwater, the problem for Louisiana-Pacific (NYSE:LPX) is pretty obvious. True, building and remodeling activity has not ceased entirely, but there's a lot of bubble-built capacity out there, and not nearly enough activity to let a leading building materials company like Louisiana-Pacific profit. It's not hard to build a model that suggests LPX is significantly undervalued, but with so much of the recovery baked into those years far ahead, the uncertainty is sky-high.

Some Good, Some Bad In the Third Quarter  
To be sure, it's not as though activity has ground to a halt. LPX actually reported 9% sales growth for the quarter, with basically flat results in Oriented Strand Board (OSB), 7% growth in siding and 44% growth in engineered wood products. For the most part, a familiar theme still rings true - volume growth is there, but pricing is weak.

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Investopedia: UFPI Tries To Wait Out The Storm

In the food chain of building products, Universal Forest Products (Nasdaq:UFPI) is stuck in an uncomfortable middle. UFPI doesn't grow trees, so it doesn't have the luxury shared by Plum Creek (NYSE:PCL) or Rayonier (NYSE:RYN) of just trimming back harvests and waiting for the bad times to pass. As a value-added producer of wood products, it also cannot do much to drive demand - if Pulte (NYSE:PHM) isn't building homes and if remodelers aren't heading to Home Depot (NYSE:HD) to get supplies for remodeling projects, there's almost nothing the company can do about it.


Consequently, while UFPI appears in many respects to be a well-run company, it is in pretty rough shape these days. A recovery in the core markets is an eventual inevitability but can the company and its shareholders hold on long enough to reap the benefits?

Another Tough Quarter
UFPI has been on an unfortunate run of late, and the third quarter isn't any different. Revenue was basically in line with analyst expectations, but still down more than 2%. On the margin side, the picture is more mixed: the company did better than might be expected given the market conditions, but the company still missed the bottom line estimate.


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Investopedia: Plum Creek Timber Is Still A Little Warped

Timberland may be a great investment class, but it does not automatically follow that Plum Creek Timber (NYSE:PCL) is a great investment at any and all times. While these are indeed still down days for the residential building market (a major consumer of timber from saw logs) and real estate in general, Plum Creek is not looking all that cheap. Such is the dilemma when investors fully buy into the underlying soundness of a company's core business. 

Some Good, But More Bad in Q2 Results  
Plum Creek surpassed analyst expectations for second quarter revenue growth, but the company's 10% growth was bulwarked in large part by real estate sales. Timber revenue fell 5%, while revenue from timberlands sold for real estate jumped 84%. Sawlog volume was weak in general - hurt by bad weather in the Northwest and good weather in the South (which pressured prices and led Plum Creek to hold off on harvests). Prices were higher for Northwest products and lower for Southern, and the company saw more than one-quarter of its Northwest harvest go to China.

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Investopedia: Signs Of Dry Rot In The Building Market

It is easy to get confused and frustrated trying to figure out the housing and homebuilding market these days. A company like Toll Brothers (NYSE:TOL) can seem to be doing a little better, only to see news a few weeks later about dour housing starts or hear disappointing news from Lender Processing Services (NYSE:LPS) about the state of foreclosures. 

Adding fuel to the fire is Friday's news from Universal Forest Products (Nasdaq:UFPI) that their traditional peak selling season was disappointing and the lumber market is in tough shape. While bad news at UFPI does not guarantee bad news for Pulte (NYSE:PHM), Lowe's (NYSE:LOW), USG (NYSE:USG) or American Woodmark (Nasdaq:AMWD), it does offer up evidence that the long-hoped for recovery is still waiting to bloom.

When a Peak Becomes a Valley
The period from March to May is supposed to be some of the strongest months in the year for Universal Forest Products, a producer of lumber and various building products. Unfortunately, the company announced last Friday that year-to-date sales were down 9.5% through May, retail sales were down 15% and the lumber market declined for 11 straight weeks during what should have been a strong selling period.


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(Repost) Investopedia: Looking For Reorientation On Louisiana-Pacific

Several years after the rupture of the housing market, there is still no joy among the companies that supply building materials. True, many product markets have stabilized, but investors rarely get very excited about "less worse". As a leading supplier of an increasingly popular building material, Louisiana-Pacific (NYSE: LPX) should see a very strong rebound in margins and stock performance when homebuilding picks up, but the stock could be dead money until and unless that happens. (For more, see 8 Signs Your Neighborhood Is On The Upswing.)


Q1 Results - Good, Bad and Ugly
Investors were not overly thrilled with LPX's first quarter results, as the company's loss was quite a bit worse than analysts had forecast. It was not all bad news, though.

Revenue rose 12% this quarter versus a year ago, mostly on the strength of siding and oriented strand board (OSB). Given that housing starts dropped about 10% during the first quarter versus the year ago quarter, that is a pretty impressive performance. In OSB (oriented strand board), LPX saw 18% volume growth as more and more builders choose OSB over plywood. 



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