LEGH - Legacy Housing Corporation: Worrisome Trends And Lacking Catalysts

2023-08-22 01:30:19 ET

Summary

• Legacy Housing Corporation is facing declining revenues and lower demand in the housing market, leading to a less equal market.
• Despite mixed quarterly results, LEGH has shown some resilience in net income and margin retention.
• LEGH's financials are solid, with low liabilities and the potential for stronger earnings and returns when market conditions improve.

Investment Summary

The housing market has been a rollercoaster for the last several years and companies in it have seen their revenues skyrocket during the housing boom of 2021 and 2022, but it seems we are heading lower as affordability is growing. This further enriches the divide between buyers and sellers and creates a less equal market. Less momentum and activity are hurting companies like Legacy Housing Corporation ( LEGH ) which relies on strong demand to grow their revenues.

Just from the last quarter the revenues declined every year by 18% and ended up at $52 million. With a focus on industry home shipping and manufacturing, seeing the overall demand for that in the US drop by 29% and not be reflected with LEGH is at least a little bit reassuring. The outlook for homebuilders is mixed and I think the current valuation of LEGH is slightly misleading as a higher p/e going forward seems likely as demand sinks. Instead of a buy, I am rating LEGH a hold instead.

Quarterly Result

The last results for LEGH were mixed as we learned. The company did well in light of what broader demand showed for industry home shipments. Some margin retention was had in the quarter as the net income landed at $15 million and only showed a 13% YoY decline. This showcased some reliance and is part of the reason why I have LEGH as a hold still.

In terms of the estimates for the quarter they were quite poor, but seeing LEGH miss on revenues by $2.5 million didn't necessarily reassure the markets that the current conditions are very solid.

Despite the challenging market conditions, the shares outstanding continue to be quite resilient at around the 24 million mark. A slight improvement and positive from the quarter was the consumer and MHP loans interest that LEGH managed to generate some more revenues from, growing from $7.4 million in Q2 2022 to $8.4 million in the last report. The cost of products however has seen a steady decline as lumber prices have retracted from their previous highs. This favors LEGH and building up a stronger inventory level might seem appropriate in times like this, I think. These decreases are ultimately what helped LEGH maintain margins in the face of lower demand very well.

Diving a little deeper into the business of LEGH, the primary focus lies on building, selling, and also financing manufactured homes and tiny houses. The market is mostly in the southern part of the United States. The company also provides the transporting of mobile homes and financing to dealers and mobile home parks. Diversifying its revenue streams, LEGH has also begun engaging in floor plan financing and the development of new housing communities.

Risks

LEGH has been experiencing a shift in demand for housing as affordability is at some of its lowest levels ever. During the most recent quarter, a discernible trend emerged with a notable decline in shipments across all three manufacturing plants. Furthermore, it's worth highlighting that this quarter marked a deviation from the norm observed in the previous year, as we refrained from transitioning any independent dealer consignment agreements into floor plan financing agreements, a practice that had been consistently adopted during most quarters last year.

This apparent reduction in shipment activity raises important questions regarding the factors contributing to this shift. Evaluating the various elements that might have influenced this outcome provides a comprehensive understanding of the dynamics at play.

Amidst the COVID-19 pandemic, historically low mortgage rates played a pivotal role in igniting a homebuying frenzy. This unprecedented surge in demand for homes during the pandemic era facilitated an exponential rise in home prices. While the pace of this ascent may not be as rapid as experienced in previous years, it's important to acknowledge that home prices continue to maintain a substantial elevation. I think it's unlikely we see such a large boom in demand for housing as we saw the last few years, but seeing persistent demand is likely because we still have a lack of housing in the country which is inflating demand.

Financials

Looking at the financials of LEGH they look quite decent. The company vastly outweighs the total liabilities in comparison to its assets a first glance.

With total liabilities of just $52 million, the company is in a good position financially to weather this downturn. In most cases, I would see that a small cash position of just $1.5 million is a little concerning, but when LEGH doesn't hold any significant debts the issue becomes less scary.

Going into coming quotes though, I think that LEGH would do well in building up a higher integrity level as lumber prices are decreasing. They would, when market conditions turn around and become more valuable, likely be able to leverage that into far stronger earrings and returns. Looking at ROA for example, its TTM amount is 14.1% which is incredibly strong and a big appeal for the company. All in all, the financial conditions of the company are solid and I think LEGH won't be facing any significant challenges here going forward.

Valuation & Wrap Up

Investing into the housing market right now seems risky, especially if your option is LEGH which specializes in tiny homes and mobile homes. The affordability of houses has significantly increased over the last decade and sits at its highest level ever.

Higher mortgage rates have also had a toll on LEGH as demand has been lower. This seems likely to persist in the short-term and for investors looking at LEGH right now, I think they will be better off holding shares rather than buying. The valuation is slightly misleading as demand sinks and the FWD p/e is increasing in comparison to the TTM one. Rating LEGH stock a hold right now.

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