Over the past six months, UFP Industries’s shares (currently trading at $81.49) have posted a disappointing 10% loss, well below the S&P 500’s 9.9% gain. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is there a buying opportunity in UFP Industries, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think UFP Industries Will Underperform?
Despite the more favorable entry price, we don't have much confidence in UFP Industries. Here are three reasons we avoid UFPI and a stock we'd rather own.
1. Long-Term Revenue Growth Flatter Than a Pancake
A company’s long-term sales performance is one signal of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Unfortunately, UFP Industries struggled to consistently increase demand as its $6.19 billion of sales for the trailing 12 months was close to its revenue five years ago. This was below our standards and signals it’s a low quality business.
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for UFP Industries, its EPS declined by 1.8% annually over the last five years while its revenue was flat. This tells us the company struggled because its fixed cost base made it difficult to adjust to choppy demand.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, UFP Industries’s ROIC has unfortunately decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
UFP Industries falls short of our quality standards. Following the recent decline, the stock trades at 16.5× forward P/E (or $81.49 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are better stocks to buy right now. We’d recommend looking at one of our top software and edge computing picks.
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