cavco industries: the last house standing

Believe it or not, mobile home stocks used to be good places to park your money. Twenty years ago, the so-called “manufactured housing” industry was widely followed by Wall Street analysts, and public companies like Clayton Homes, Champion Homes, and Palm Harbor Homes were all rated strong buys.

Then the roof caved in.

First, the easy credit of the early-2000s housing bubble allowed many first time buyers to choose “site built” homes instead mobile homes. That was followed by the 2008 crisis, when financing for all types of homes, mobile or otherwise, evaporated.  Now, US mobile home production hovers around 70,000 units, down from a peak of 350,000 units in the late-1990s.

But a few companies have managed to weather the storm. The top three builders now command a combined 72 percent of the market. Berkshire Hathaway owns the largest of them, Clayton Homes, which accounts for 45 percent of all US mobile home production. The third largest company, Champion, is privately held. Aside from tiny Skyline Corp (SKY), that leaves only one publicly traded option for most stock investors: the second place company by market share, Phoenix-based Cavco Industries (CVCO).

Cavco was spun out of Dallas-based homebuilder Centex in 2003. Today, it operates 19 manufacturing plants and 45 company-owned retail stores. The average Cavco home is 500 to 3000 square feet, and brings the company about $50,000. Cavco has been profitable every year since 2003. In fiscal 2016, it made $29M (or $3.15/share) on $712M of revenues vs. $24M (or $2.64/share) on $567M of revenues a year ago. Unlike almost all site built homebuilders, Cavco has no debt and is sitting on $108M in cash, or $12/share. Fiscal 2016 free cash flow was $42M, and should grow to $45M in fiscal 2017 and $53M in fiscal 2018. That means, in two years, Cavco could have nearly $200M cash, or about $21/share. Not bad for an industry plagued by excessive debt and, for site builders, high amounts of land inventory.

At today’s share price of $99, CVCO sells for 24x current year EPS of $4.15. That’s not cheap, but a number of catalysts could boost the stock: 1) price competition is unlikely, as Berkshire Hathaway subsidies rarely cut prices to gain market share, which means Cavco’s 20 percent gross margin and 6.4 percent pretax margin should increase in upcoming years; 2) stock buybacks and/or a dividend initiation are likely, as management wants to return cash to shareholders; and 3) the manufactured home industry should grow as a percent of the entire housing industry as financing becomes easier and a secondary market (securitization) is re-established.

Finally, I suspect revenue, profit, and cash flow growth will compel additional brokerage industry analysts to recommend Cavco shares. At the moment, only one analyst from an obscure firm writes research on the company. I expect that number to grow. Cavco just announced a 2-for-1 stock split, and the upcoming annual meeting, as always, will be held this June at the company’s Phoenix headquarters. Having grown up in the area, I can safely guarantee comfy 105-110 degree weather that day. Last year, exactly one outside investor attended. (I think he mainly came for the sandwiches.) As Cavco’s fortunes continue to improve, a lot more people should begin to take notice.


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