SKY - Cavco Industries: Meeting The Evolving Needs Of The Housing Industry

2023-03-30 06:38:46 ET

Summary

• Strong margins and financials make CVCO better positioned to invest in growth opportunities and value creation.
• Modular housing is gaining popularity because of economic, social, and demographic factors.
• Higher mortgage interest rates may evoke more demands on affordable housing.
• I would recommend continuing to monitor the company's performance and entering at a favorable price for the long-term hold.

Thesis

Cavco Industries Inc. (NASDAQ: CVCO) is a leading company with good track record of revenue and earnings growth. The company has achieved organic growth through improving existing operational efficiency and pursued strategic investments and acquisitions to expand their manufacturing and retail presence. CVCO gross profit margin has been steadily increasing over the years and has a good cash balance to support the company future acquisition plans and share repurchases.

The management has been investing in the digital platform, which can enhance customers’ shopping experience and educating potential homebuyers on the value of manufactured homes.

A combination of factors driving the popularity of manufactured homes – economic, social, demographic factors, the appealing aspects of a manufactured home, and the potentials in the untapped market, this industry is in a favorable position and has growth potentials.

With a strong management team and the long-term growth prospect, the company is worth monitoring and to enter at a favourable price for the long-term hold.

Company Overview

CVCO is a North American company that designs and manufactures factory-built housing products, including manufactured homes, modular homes and park model RVs. It retails under several brand names, including Cavco Homes, Fleetwood Homes, and Palm Harbor Homes The company operates across the U.S., and has a strong presence in the southwestern region.

In the latest FY2023 Q3 earnings call ( Cavco Industries, Inc. Q3 2023 Earnings Call Transcript), EPS is $6.66, surpassing estimates by $0.99. The company has delivered earning surprises for the past 11 quarters.

CVCO’s strong performance in recent years is due to the strong demand for new houses in the U.S., driven by scarcity of existing homes for sale and the need for affordable housing. Additionally, an aging population, first-time homebuyers, and low-income households have also contributed to the increased demand.

The company has achieved organic growth through improving operational efficiency to boost profitability and capacity utilization at their existing facilities, expanded product offerings and successful sales strategies. Over the years, they have also pursued strategic capital allocation for acquisitions to expand their manufacturing presence with great success. Acquisition will continue to be a growth strategy for the company.

CVCO competes with other companies in the manufactured and modular home industry, including Skyline Champion (SKY), Legacy Housing Corporation (LEGH) and Clayton Homes (a subsidiary of Berkshire Hathaway).

As the housing industry continues to evolve and affordable housing becomes critical, CVCO is established and well-positioned to cater to the changing needs. I will elaborate below on how CVCO can benefit and grow in the future.

1. Modular housing is gaining popularity because of economic, social, and demographic factors.

Modular housing has becoming more popular in recent years due to its potential benefits over traditional construction methods, such as the speed of construction, affordability, and the ability to customize design. It is also driven by a combination of economic, social, and demographic factors, like an increasing income inequality, an aging population and rapid urbanization.

According to a market research report published by Extrapolate in February 2023 ( Global Modular Construction Market and Construction Chemicals Market Size 2023, Recent Developments, Key Innovations, Emerging Demands, Top Company Data, Latest Technology, and Future Prospects Till 2032 ), the global Modular Construction Market had a value of USD 101.3 billion in 2022, and it is expected to grow to USD 168.7 billion by 2032, with a CAGR of approximately 5.8% from 2023 to 2032.

One of the biggest advantages is the cost efficiency. The cost per square foot of manufactured and modular homes is around 10 to 20 percent lower than that of traditional site-built homes ( How Much Are Modular Home Prices? ), thereby a good alternative for people in the face of the housing affordability gap.

During the FY2023 Q3 presentation, the management team discussed the positive outcomes of their digital marketing efforts. They highlighted how potential homebuyers can access and explore a wide range of floor plans – consisting of 1,500 manufactured, modular, and park model options – as well as 2,700 stock models under their flagship brands. This extensive selection provides an opportunity to educate homebuyers on the benefits and attractive features of manufactured homes.

Given the current economic conditions, the appealing aspects of a manufactured home, and the potentials in the untapped market, the manufactured home industry is in a favorable position and has the capacity to expand its reach to a larger audience.

2. Higher mortgage interest rate may evoke more demands on affordable housing.

Mortgage interest rate is one of the biggest considerations for the homebuyers. Due to the perceived risks associated with modular construction and the limited resale market, modular homes typically having slightly higher interest rates than the traditional homes. Over the years, the interest rate spread between the two has generally been stable.

Between 2022 and early 2023, the mortgage rate has climbed greatly, largely attributed to Fed’s rate hike to help combat inflation. With the rate hikes, inflation is starting to cool and many economic indicators remaining robust. Although the Fed may begin to ease some of the pressure, and that there is a possibility that mortgage rates may moderate, it is unlikely that they will return to the low levels seen during the pandemic. The higher mortgage rate, in general, may invoke more demands on these cost-efficient modular housing.

Reiterating from the above, the manufactured and modular homes can cost approximately 10 to 20 percent lower than that of traditional site-built homes. The management has also shared that they are providing homebuyers the ability to access a wide range of floor plans to choose what suits them best. This initiative can potentially alleviate some of the cost pressures associated with purchasing a home and help homebuyers achieve a more manageable payment plan for their desired house.

3. Strong margins and financials make CVCO better positioned to invest in growth opportunities and value creation.

CVCO's gross profit margin has been progressively rising over time, and this has been attributed, in part, to the effective operational management of the company. The plants have been able to maintain a high level of efficiency, contributing to the overall improvement in the company's profitability. The production volumes were down in markets where demands softened or retailer inventory de-stocking, which is offset by the increase in the average selling price per U.S. home.

CVCO’s cash balance is at $376 million, with $2 million in both short- and long-term debt. Cash is mainly built from their operations, with the CFO ((TTM)) at $248 million.

Though the company does not pay any dividend, CVCO does have a solid cash balance and cash generation potentials to create value for shareholders through strategic investments and share repurchase program.

Valuation and opinion

My valuation for CVCO stock is based on CVCO’s financial statement and earning forecast, and the data is driven by Seeking Alpha data. ( Cavco Industries, Inc. Earnings Estimates)

In today’s current economic conditions and the need for affordable housing solution, the manufactured home industry is in a favorable position and has the potential to reach to a larger audience. CVCO has been in the business for almost 60 years and has expanded both organically and through strategic acquisition. Coupled with its impressive financials standing and growth prospect, the company is worth monitoring and to enter at a favourable price for the long-term hold.

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