NOBH - Nobility Homes: All The Right Pieces In Place For Long-Term Growth

2023-07-06 14:27:50 ET

Summary

• Nobility Homes is experiencing multiple positive developments, including supply chain easements and improved inventory, which could lead to its stock price rising past its previous all-time high.
• The company has seen impressive growth in average home prices and net income, with a 126% increase in net income between the first six months of 2022 and 2023.
• Nobility Homes has a vertically integrated business model with no debt, allowing it to capitalize on Florida's booming housing market even if housing prices fall.

Nobility Homes, Inc. ( NOBH ) has multiple positive converging developments that I believe will lead to its stock price rising past its previous all-time high. Supply chain easements, improved inventory, along with a unique advantage in pricing power gives NOBH a clear path to continue its impressive growth story over the course of the next year. With no debt and a vertically integrated business model where NOBH owns its manufacturing facility and most of its sales centers means that this company has a unique advantage in controlling pricing and manufacturing costs that will help them fully capitalize on Florida's booming housing market even when or if housing prices fall in the state. For these reasons, I do believe NOBH is currently a buy.

About Nobility Homes, Inc.

On a 35.5 acre parcel of land in Ocala, Florida that is home to both its corporate offices and in another building on the property its manufacturing facility, NOBH builds manufactured housing and currently has an active production on approximately 100 different house models. Once built, these houses get sold primarily through NOBH's Prestige brand facilities which are located in Ocala South, Ocala North, Auburndale, Inverness, Tavares, Panama City, Yulee, Punta Gorda, Chiefland, and Hudson, Florida. NOBH owns all of these retail outlets except for the Chiefland and Hudson locations which are leased. NOBH has also been expanding its current business capacity by buying more land in Ocala for a new retail center as well as breaking ground on a new 11,900 square foot facility to make steel frames for its houses. Nobility has been building manufactured housing for a long time and earlier this month it celebrated its 56th year in business.

The Numbers for 2021 and 2022

Nobility Homes has seen impressive year-over-year increases in the average price one of its houses sells for. When looking through NOBH's 2022 10-K you'll see that 2022 saw an average retail price of $126,438 for a new Nobility Homes, which is a 26% increase in price from the average of $93,824 in 2021. The average wholesale price for a home from NOBH increased 31% from $50,183 to $72,983. This massive increase in the average price of a house was responsible for NOBH's 23% increase in gross profit from $11.4 million in 2021 to $14.9 million in 2022, helping the company increase its net income by 34% from $5.4 million to $7.2 million. Even with a decrease in year-over-year total homes sold and an increase in raw material and labor costs, NOBH has been able to increase its profit per sale despite this high interest rate environment. This ability to raise prices and still have the end product priced way below the average sale price of new houses sold - which was $491,000 in Q4 of 2021, $568,700 in Q4 of 2022, and sits at $516,000 in Q1 of 2023 - gives NOBH a huge advantage over conventional and more expensive housing, especially if housing prices continue to rise.

2023 Numbers

While NOBH saw impressive growth from 2021 to 2022 the first six months of 2023 have been even more outstanding. According to NOBH's most recent 10-Q filed on May 6, 2023, total net sales for the first six months of 2023 are up 58% compared to the first six months of 2022, from $21.4 million to $33.9 million. Net income increased a jaw-dropping 126% between the first six months of 2022 and 2023 from $2.6 million to $5.9 million. The astonishing increase is due primarily to the easement of many severe supply chain problems NOBH experienced in 2022 that greatly limited their ability to complete houses and deliver them to customers. While Nobility is seeing supply chain problems easing, there are key production materials that continue to cause bottlenecks and delay NOBH's ability to complete orders in a more time-efficient manor. To deal with these problems, NOBH sold 39 new homes from other manufacturers in the first six months of 2023 to help reduce their backlog. The company expects these remaining supply chain issues to remain present throughout the rest of 2023.

In just about every positive income metric category, NOBH saw growth in 2023. Gross profit as a percentage of net sales was 35% in the first six months of 2023 versus 27% for the first six months of 2022. Interest income saw benefits from higher interest rates resulting in NOBH raking in $310,015 in the first 6 months of 2023 as compared to $114,257 for the first six months of 2022. The average sale price for a new manufactured home from NOBH jumped significantly once again between the first six months of 2022 and the first six months of 2023. During that period the average retail price for a new manufactured home increased from $115,533 to $146,960, another 21% jump, while the average wholesale price for a new manufactured home jumped 8.5% from $69,172 to $75,525. All of this good news has led NOBH to an absolutely stunning 96% increase in net income from $1.5 million to $2.9 million when comparing the first six months of 2022 and 2023 against each other.

Lots of Assets and No Debt

Currently, NOBH holds $15.2 million in cash and cash equivalents, $7.9 million in certificates of deposits, and $23 million in current inventories which make up the majority of the $49.6 million in total current assets the business had reported as of May 6, 2023. NOBH holds $8.2 million in the net property, plant, and equipment category, $4.2 million in cash surrender value of life insurance, and $1.9 million in other investments that make up the rest of the significant portion of its $64.4 million in total assets. NOBH has no debt at all and 63% of its $13.9 million in total liabilities are customer deposits amounting to $8.8 million. $1.2 million in accounts payable, $1.2 million in accrued compensation, $1 million in income taxes, and $1.7 million in other expenses and liabilities make up the rest of the relatively short list of liabilities NOBH has to answer for. That remaining $5.1 million is covered 3 times over just by NOBH's current cash holdings and therefore any problems relating to debt are extremely unlikely to arise in the foreseeable future. Looking back through 10 years of financial records, NOBH has never carried debt. This complete absence of debt and lack of any major liabilities adds a huge cushion of safety and gives a lot of flexibility to change business strategies should any changes in the housing market occur that would warrant NOBH to adjust operations accordingly.

A Closer Look at Inventory

Nobility seems to run a lean inventory. Most of its inventory is for sale on the lot in the form of a finished product and comparatively few raw materials and works in progress waiting to be completed are laying around their manufacturing facility. Of the $23.3 million worth of inventory NOBH currently has only $1.3 million of it is raw materials and unfinished works in progress. $233,045 worth of model home furniture is also listed under inventory bringing the total product other than ready-for-sale houses to a little over $1.5 million leaving an impressive $21.8 million worth of inventory that is purely houses ready to be sold to customers.

Of this $21.8 million of NOBH's inventory, $11.1 million of it is Nobility built homes and $9.9 million worth comes from other manufacturers to help NOBH fill its backlog. $769,272 of inventory is pre-owned homes NOBH gets as trade-ins and $21,143 worth of it is housing cosigned to other entities affiliated with Nobility.

The vast majority of NOBH's houses are sold through its Prestige brand sales centers it owns. In the first 6 months of 2023, NOBH sold 208 houses and produced 253 versus just 164 houses sold and 205 houses produced in the first 6 months of 2022 through these company-owned retail centers. NOBH also sold 63 homes to independent dealers in the first six months of 2023 versus just 15 in the first six months of 2022. The only home sales figure that has decreased for NOBH is its pre-owned home sales sold through its company-owned sales centers which have never been a substantial source of income for the company at just 4 houses in the first six months of 2023 and 9 in the first six months of 2022. As can be seen from these sales volumes NOBH is starting to ramp up its production capacity in 2023 as supply chain and labor problems start to slowly become less and less of an issue. This capacity to increase production alongside its strong position within the manufactured housing industry to be able to push price increases to their customers puts NOBH on a path to continue to grow its revenues well into the foreseeable future.

Stock Buybacks, Options, and Management

In the fiscal year of 2021 NOBH repurchased an aggregate of 100,346 shares of stock, 162,570 shares of stock in 2022, and for 2023 management has approved the repurchase of 200,000 shares of stock to be bought on the open market. These 3 years of steady increases in stock buybacks look promising and should help increase value to the shareholders by concentrating wealth in the small number of shareholders remaining which is already low. As of January 31st, 2023, NOBH only had approximately 86 shareholders on record (not including individual participants in security position listings). NOBH also has 233,800 options available that it can grant to employees or non-employee directors through June of 2026. These options to purchase common stock in the company are handed out for a variety of reasons as an incentive to retain personnel and NOBH has until June 2026 to award them. Currently, NOBH has 66,200 options outstanding.

Florida's Population Growth and Changing Income Demographics

Between 2021 and 2022 Florida had the fastest-growing population in the U.S. expanding by 1.91% and 1.1% between 2020 and 2021. According to Forbes , Florida also rates 6th in highest levels of income inequality. Both Florida's rent prices and home sale prices are way above national averages too, making an increased demand for affordable manufactured housing all but inevitable. NOBH's $149,797 retail price for a home is just a fraction of the average $419,000 sale price for a single-family existing home in Florida. Florida's population growth and home prices while slowing are still appreciating. With the average price of a house in Florida as high as it is and still rising NOBH is perfectly positioned to fully benefit. With no debt, Nobility can fully realize its revenues and not have to worry about paying a high interest rate on its incurred debts which will be cutting into competitors' profit margins.

Risks

While it is extremely unlikely NOBH's business proceedings will suffer from anything related to how it manages its money it is still susceptible to downward macro-economic trends. If housing prices do manage to fall after an extended period in a high interest rate environment it would likely shift customer demand back into traditional stick built housing. If this were to happen the shift in consumer sentiment could pull demand away from the manufactured housing industry.

Another concern is NOBH's increase in customer complaints about the quality of its homes it has been selling to customers. Although it is hard to say for certain the scale of problem, NOBH seems to be running into some issues with the quality of its product. Customers often complain about bad roofs, electrical work, and many odds and ends components that do not function as intended. NOBH also has an increasing number of negative reviews specifically about how the company handles complaints and customer warranty issues with many customers saying the company will not come out to fix their product in the field and or will argue about whether it is the responsibility of the company or not to fix whatever problems have arisen with its homes. NOBH also has a D- rating with the Better Business Bureau due to its lack of response to customer complaints. With that in mind, NOBH's vertical business integration where they own their sales centers means that independent retailers can't just drop their product all at once. If a large part of Nobilities' manufactured homes were sold by independent merchants then these negative reviews and bad ratings by the Better Business Bureau would likely lead to independent sales centers dropping all of NOBH's product from their properties. Since that is not the case, however, we will likely see a steady decline in sales over a period of time if these reviews do in fact negatively impact NOBH's business.

As previously mentioned the state of Florida's housing prices are rising much faster than the national average, their population growth is booming, and their income inequality demographics make demand for manufactured housing all the more certain. With a tight housing supply, this leaves lower-income Floridians with few other options other than manufactured housing. Nonetheless, in the event that NOBH does see a decline in home sales in conjunction with a continuing increase in negative reviews despite further supply chain easements, I would sell this stock.

Stock Performance

From 2013 to 2021 NOBH has had a significant and consistent rise in stock price. As 2021 approached and the red-hot housing market saw supply chains bottleneck and NOBH began experiencing difficulty filling its orders the stock receded back to 2020 levels hovering around $23-$24 at the end of 2022. Positive quarterly statements and an improved ability to complete orders have since boosted the stock's performance; from May to June of 2023, NOBH experienced an impressive 34% increase from $23 to $30.80 a share before receding to its current $28.25 as of June 29th. While the very recent receding stock price may put off some investors NOBH has lower valuations than its sector medians on its forward price-to-book ratio (1.94 vs. 2.13), TTM dividend yield 3.45% vs. 2.35%, and its GAAP price to earnings ratio (9.29 vs 16.87). A P/E ratio that is 44.9% below the sector median without any apparent underlying business problems and a promising future due to demographic shifts as well as a vertical integration that puts NOBH in an excellent position to leverage future price increases gives me the conviction that NOBH is currently a buy. If NOBH's stock price was in line with the sector median, its stock would be sitting at $40.95. Even if it rose to only half the P/E ratio of the sector median and sat at $34.60, an investor buying at the current price would still realize a healthy 22% gain.

Peer Comparisons

NOBH's peer comparisons look promising as NOBH outshines its competition on its return on assets of 15.55% coming out in front of Legacy Housing Corporation's ( LEGH ) 15.00% return on assets while most other peers sit between 4.64% and 12.19% in this category. NOBH also sits atop its peers on its return on total capital coming in at 17.40% while Dream Finders Homes, Inc. ( DFH ) has a 14.29% return on total capital which itself outperforms other peers sitting between 6.7% and 13.08% in this category. At 16.46% NOBH has double the net income margin of all of its peers except for LEGH, which sits at an impressive 27.19%. NOBH also sits in second place amongst its peers in return on equity, at 22.48%, only outperformed by DFH's 38.68% return of equity.

NOBH has been a leader amongst its peers in year-over-year EBITDA growth of 120.37%, year-over-year diluted earnings per share growth of 112.50%, and comes in a close second place behind DFH in year-over-year revenue growth at 49.91%. Nobility's growth story becomes even more impressive when you consider that it has no debt in a very debt-heavy industry and in fact outperforms its peers in both its quick ratio of 1.76, its total debt to equity percentage of 0%, and its net debt of -$23.49 million.

Conclusion

There are multiple layers of value built into NOBH that make it an appealing buy. NOBH has absolutely no debt and has been debt-free for at least a decade if not longer. Owning their own chain of retail outlets where the vast majority of their sales come from will give NOBH more pricing power and a greater ability to change their products or how they're sold to better meet Florida's rapidly changing housing market and to rapidly adapt to the many post COVID-19 supply chain problems still plaguing the home building industry. This lack of debt obligations and vertically integrated manufacturing facilities and sales centers will allow NOBH to realize its full revenue potential and make it less susceptible to the current rapidly changing high interest rate environment. Florida's rapid population growth coupled with its changing dynamics in Floridian's income makes it look like NOBH has a clear-cut path to a continued expansion in both earnings and net income for some number of years. If the price-to-earnings ratio of NOBH's stock falls in line with the normal industry median, you could be looking at a 44.9% rise in price to $40.95 but even if I'm only half correct and the stock only hits $34.60, that is still a 22% jump in price.

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