Data Center Workforce Housing Demand Will Shape Margins Amid Credit And Capacity Challenges

Catalysts

About Legacy Housing

Legacy Housing designs, manufactures and finances factory built homes serving value focused housing markets in Texas and the Southeast.

What are the underlying business or industry changes driving this perspective?

• While the company expects a production lift from one of its strongest order shows and new data center driven workforce housing demand in Texas, ongoing softness in broader manufactured housing shipments could cap unit growth and constrain top line expansion.
• Although the remote dealership management platform and AmeriCasa acquisition are intended to boost company owned retail volumes, integration risk and execution missteps could prevent the expected mix shift toward higher margin retail sales from fully materializing in earnings.
• Despite a sizable, high yield consumer and chattel loan book that has historically provided stable interest income, rising charge offs from post COVID vintages and potential pressure on immigrant borrowers could erode credit quality and compress net interest contribution to net income.
• While land holdings and projects such as the Bastrop County community offer embedded value and eventual pull through demand for Legacy built homes, permitting delays, infrastructure bottlenecks and opportunity cost versus outright land sales may defer revenue realization and keep returns on equity near current levels.
• Although price increases and industry wide recognition of structurally higher input and labor costs support firmer pricing, elevated tariffs, excess factory capacity in Texas and the Southeast and intensified discounting by peers may limit Legacy's ability to rebuild product gross margins and overall net margin.

Assumptions

This narrative explores a more pessimistic perspective on Legacy Housing compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Legacy Housing's revenue will grow by 1.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 26.7% today to 29.6% in 3 years time.
• The bearish analysts expect earnings to reach $55.6 million (and earnings per share of $2.26) by about December 2028, up from $48.1 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $61.3 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.1x on those 2028 earnings, up from 10.3x today. This future PE is greater than the current PE for the US Consumer Durables industry at 10.8x.
• The bearish analysts expect the number of shares outstanding to decline by 1.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.37%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent input cost inflation and volatile tariffs on imported materials, which have already cut product gross margin from 29.2% to 20.28% in the latest quarter, could prove more structural than temporary. This could erode pricing power in a competitive Texas and Southeast market and put sustained pressure on net margins and earnings growth over the long term.
• Macro and regulatory headwinds facing key customer groups, including softer consumer confidence, immigration enforcement that is already reducing Hispanic demand, and weaker economics for mobile home park operators, may structurally dampen unit demand in core regions. This could limit the benefit from secular housing affordability trends and constrain long-run revenue growth and loan portfolio expansion.
• A prolonged mismatch between high fixed manufacturing capacity, especially at the underutilized Georgia plant, and only modest demand growth in the Southeast could force Legacy to operate inefficiently or rationalize capacity. This would weigh on product margins and could reduce earnings and returns on equity if utilization does not improve despite favorable Sunbelt population migration trends.
• The growing concentration and complexity of the consumer and chattel loan book, which has expanded by 12.8% over twelve months while recovery values on post-COVID repossessions have deteriorated, increases long-term credit risk. Any cyclical downturn, higher charge-offs or sustained pressure on resale prices could materially weaken interest income, compress net interest contribution and drag on net income.
• Execution risk around strategic initiatives such as the AmeriCasa acquisition, rollout of remote dealership management software and development or monetization of land holdings like Bastrop County means that, if integration under new leadership underdelivers, Legacy may fail to capture the upside from favorable secular drivers such as data center-driven workforce housing and Austin land appreciation. This could limit improvements in revenue mix, product gross margins and overall earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Legacy Housing is $21.0, which represents up to two standard deviations below the consensus price target of $25.67. This valuation is based on what can be assumed as the expectations of Legacy Housing's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $28.0, and the most bearish reporting a price target of just $21.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $188.0 million, earnings will come to $55.6 million, and it would be trading on a PE ratio of 11.1x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of $20.72, the analyst price target of $21.0 is 1.3% higher. 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.