Over the past six months, UFP Industries’s stock price fell to $92.99. Shareholders have lost 6.7% of their capital, which is disappointing considering the S&P 500 has climbed by 13.1%. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
Is there a buying opportunity in UFP Industries, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free for active Edge members.
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. Demand Slips as Sales Volumes Slide
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Building Materials company because there’s a ceiling to what customers will pay.
Over the last two years, UFP Industries’s units sold averaged 4.4% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests UFP Industries might have to lower prices or invest in product improvements to grow, factors that can hinder near-term profitability. 
2. EPS Took a Dip Over the Last Two Years
Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.
Sadly for UFP Industries, its EPS declined by more than its revenue over the last two years, dropping 20.4%. This tells us the company struggled to adjust to shrinking 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. Unfortunately, UFP Industries’s ROIC has decreased significantly over the last few years. 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× forward P/E (or $92.99 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are superior stocks to buy right now. We’d suggest looking at one of Charlie Munger’s all-time favorite businesses.
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