Backlogs In Factory-Built Homes Signal Strong Future Demand

Key Takeaways

• Increased production and a significant backlog indicate strong future demand, potentially boosting revenue and earnings.
  
• Expanding manufacturing and share repurchases suggest operational efficiency and improved stock valuation potential.
  
• Weather-related revenue delays, pricing decreases, and macroeconomic uncertainty challenge Cavco's short-term revenue and profit margins across various segments and geographies.

Catalysts

Designs, produces, and retails factory-built homes primarily in the United States.

• The company is ramping production in response to improving market conditions, with units shipped in the quarter up 15.7% over the same period last year and capacity utilization increasing from 65% to 75%. This suggests potential for increased revenue and earnings as demand continues to recover.
  
• Backlogs have grown approximately 20% and now represent about 8 to 10 weeks of production, indicating strong future demand, which can positively impact future revenue and earnings as backlog orders are fulfilled.
  
• The company has effectively managed operations, minimizing production downtime despite recent hurricanes, which can help maintain steady revenue and margin stability.
  
• There is an ongoing focus on expanding manufacturing capabilities with capital expenditures, which could lead to operational efficiencies and improved net margins over time.
  
• Cavco has an active share repurchase program, with an additional $100 million authorized, which can enhance earnings per share by reducing the share count, potentially improving stock valuation.

Cavco Industries Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cavco Industries's revenue will grow by 8.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.0% today to 10.4% in 3 years time.
• Analysts expect earnings to reach $244.6 million (and earnings per share of $30.03) by about December 2027, up from $148.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.1x on those 2027 earnings, down from 27.2x today. This future PE is greater than the current PE for the US Consumer Durables industry at 11.8x.
• Analysts expect the number of shares outstanding to grow by 0.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.75%, as per the Simply Wall St company report.

Cavco Industries Future Earnings Per Share Growth

Risks

• The impact of hurricanes delayed revenue in the second quarter, leading to approximately $4 million in net revenue being pushed to the third quarter, which could potentially affect short-term revenue projections.
  
• There was a 3.1% decrease in average revenue per home sold from the prior year quarter, driven partly by a lower proportion of homes sold through company-owned stores and pricing decreases, impacting overall profit margins.
  
• The financial services gross margin decreased significantly due to losses from a reinsurance event related to hurricanes, impacting earnings and future net margins for this segment.
  
• Regional disparities, such as Florida lagging in market recovery and having thinner backlogs, could impact overall production and shipment growth, affecting revenue consistency across geographies.
  
• Uncertainty in future demand due to macroeconomic factors, like the interest rate environment and market volatility, poses a risk to revenue growth and earnings stability.

Valuation

• The analysts have a consensus price target of $491.67 for Cavco Industries based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.4 billion, earnings will come to $244.6 million, and it would be trading on a PE ratio of 20.1x, assuming you use a discount rate of 7.8%.
• Given the current share price of $497.01, the analyst's price target of $491.67 is 1.1% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.