Cavco Industries: Short-Term Issues, But A Long-Term Opportunity

1 week ago

Workshop assembly of modular buildings. 3d illustration

Cavco Industries, Inc. (NASDAQ:CVCO) manufactures and sells factory-made homes. The institution is facing immoderate existent issues arsenic request is challenging owed to the existent economy. Although Cavco has short-term challenges, I judge the existent terms reflects an accidental to bargain – arsenic the institution seems undervalued with my estimates, I person a buy-rating for the stock.

The Company

Cavco manufactures homes successful four factories, of which 2 are located successful Arizona, 1 successful Texas, and 1 successful North Carolina. The factory-made homes are a signifier of affordable housing, arsenic the manufactures homes are mostly rather low-price compared to astir alternatives specified arsenic built-on-site houses. Cavco’s homes see galore options, specified arsenic the pursuing ones:

In summation to the location sales, Cavco has a fiscal conception successful which the institution provides financing and security for the homes.

As request for affordable lodging has seen a surge successful the United States, Cavco’s banal terms has followed – the banal has accrued its terms by astir 3000% from 2003, making the stock’s CAGR a singular 18.7%.

The institution doesn’t wage a dividend, but I don’t spot it arsenic a antagonistic facet – Cavco has further reinvestment opportunities into integrated maturation and acquisitions to summation further marketplace share.

Acquisitions

In the company’s caller past, Cavco has made 2 important acquisitions. In July of 2021, the institution bought retired The Commodore Corporation for $153 million. The Commodore Corporation, a modular location manufacturer, had income of $258 cardinal successful FY2021, astir a 4th of Cavco’s revenues anterior to the acquisition.

The 2nd important acquisition was the buyout of Solitaire Homes, announced successful October of 2022. The acquisition was somewhat smaller than the erstwhile one, arsenic the acquisition outgo Cavco $93 million. The property release astir the acquisition didn’t notation financials of Solitaire Homes, but did notation important synergies betwixt the 2 companies. Solitaire Homes had 22 retail locations alongside its manufacturing facilities.

Cavco’s acquisitions look to make shareholder worth – the institution communicates that it tin execute outgo synergies, making the acquisitions worthy. The stock’s terms past besides speaks volumes – a CAGR of astir 19% isn’t maintained with sloppy usage of capital.

Financials

Cavco Industries has an awesome past of maturation – from FY2003 to FY2023, Cavco’s compounded maturation complaint has been 16.0%, achieved some organically and done acquisitions:

I judge the maturation is partially caused by a surge successful request for factory-made homes – the location benignant is much affordable than ones built on-site, and arsenic existent property prices proceed to soar, much radical are considering cheaper alternatives. If the thesis is correct, the maturation inclination should proceed into the foreseeable future, if 1 is to judge that the existent property prices should proceed their semipermanent trajectory.

Along with awesome growth, Cavco’s operating borderline has scaled rather importantly alongside revenues aft a anemic FY2010 caused by the fiscal crisis:

After the anemic year, Cavco’s EBIT borderline has lone seemed to standard up – successful FY2023, the institution achieved its all-time EBIT-margin high of 13.8%.

Cavco doesn’t look to leverage indebtedness successful its balance sheet – the institution presently lone has $1.7 cardinal of semipermanent debt. The location shaper hasn’t leveraged important indebtedness successful a agelong clip either, arsenic Cavco has lone seemed to wage disconnected a semipermanent indebtedness of $81 cardinal that was initiated successful FY2012. Cavco besides has a steadfast currency equilibrium of $352 million, providing an accidental for further acquisitions.

Current Issues

Cavco’s financials haven’t lone been a creaseless ride, though – successful the existent fiscal year, the institution seems to beryllium facing request issues arsenic involvement rates person risen. The issues are represented by Cavco’s brushed Q1 /FY2024 effect – the institution had a ample gross alteration of 19.1% on with an EBIT borderline autumn of 1.5 percent points from the erstwhile year’s level.

Related to the brushed demand, CEO Bill Boor communicated successful the company’s Q1 net call that astir of Cavco’s plants person moved onto a four-day docket successful accumulation to support a bully borderline level. The CEO did look assured that request should yet instrumentality – I americium connected the aforesaid lines. Although the challenging concern volition astir apt proceed into upcoming quarters, the semipermanent trajectory shouldn’t beryllium immoderate antithetic adjacent with a brushed Q1.

Valuation

Cavco’s existent guardant price-to-earnings ratio stands astatine 12.7 – compared to the company’s ten-year mean of 23.3, the ratio seems to beryllium precise low.

The mentioned issues are baked into the guardant estimates, with which the institution is already rather modestly priced considering the company’s maturation – the existent terms seems similar an accidental to buy.

To further analyse the valuation, I constructed a discounted currency travel exemplary arsenic usual. In the model, I estimation Cavco’s revenues to autumn by 9% successful the existent fiscal twelvemonth arsenic the request seems soft. Going further, I estimation the semipermanent maturation inclination to somewhat proceed – though little than the humanities complaint of 16%, my estimation of 11% for FY2025 seems tenable arsenic the exemplary doesn’t relationship for acquisitions. The maturation successful my DCF exemplary goes down successful steps into a perpetual maturation of 2%, representing a CAGR of 6.1% from FY2024 to FY2033.

As for the EBIT margin, I estimation Cavco to person a driblet successful the existent twelvemonth owed to a brushed demand, arsenic demonstrated by the company’s Q1 effect – I estimation a driblet of 1.9 percent points successful FY2024. Going forward, I estimation Cavco’s borderline to somewhat standard backmost dilatory into a borderline of 13.1%. This estimation is successful my sentiment somewhat conservative, arsenic Cavco has achieved changeless operating leverage. The borderline of 13.1% is besides beneath FY2023’s level, but I judge a blimpish attack is astir sensible.

These estimates on with a outgo of superior of 11.84% trade the pursuing DCF exemplary script with an estimated just worth of $350.38, astir 27% supra the existent price:

The utilized weighed mean outgo of superior is derived from a superior plus pricing model:

As Cavco hasn’t utilized interest-bearing indebtedness successful the medium-term history, I judge a precise debased semipermanent debt-to-equity ratio of 5% is reasonable. As for the involvement rate, I judge the approximate of 6% is just – the involvement complaint would beryllium good supra the United States’ 10-year enslaved yield of 4.34%. I judge the involvement complaint besides represents a existent emblematic complaint for a institution of akin size and quality arsenic Cavco.

For the risk-free complaint connected the outgo of equity side, I usage the mentioned United States’ 10-year enslaved yield. The equity hazard premium estimation of 5.91% is Professor Aswath Damodaran’s latest estimate made successful July.

Takeaway

Although Cavco is facing existent issues related to demand, I judge the semipermanent request trajectory should inactive beryllium intact with semipermanent rising existent property prices. The institution could make further shareholder worth done acquisitions with its important currency balance, and arsenic the banal already seems modestly underpriced with my DCF exemplary estimates, I person a buy-rating for Cavco Industries, Inc. stock.

This nonfiction was written by

I constitute mostly astir tiny publically traded companies, with a ample absorption connected institution valuations. My absorption is connected nether looked stocks with a ample upside to just valuation - some done accepted worth investing arsenic good arsenic maturation stocks, with a absorption connected some US and European equities. I survey Finance successful Finland.

Analyst’s Disclosure: I/we person nary stock, enactment oregon akin derivative presumption successful immoderate of the companies mentioned, and nary plans to initiate immoderate specified positions wrong the adjacent 72 hours. I wrote this nonfiction myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary concern narration with immoderate institution whose banal is mentioned successful this article.

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