Ramping Up Production In Texas And Georgia Will Strengthen Future Prospects

Key Takeaways

• Growth in loan portfolios, community business, and large order requests suggests potential revenue and earnings growth despite higher interest rates.
  
• Expansion of Texas and Georgia facilities, along with land sales initiatives, could enhance margins and create new revenue streams.
  
• Heavy reliance on non-core asset sales and challenges in sales volume and production costs could impact long-term revenue stability and profitability amid market uncertainties.

Catalysts

Engages in the building, sale, and financing of manufactured homes and tiny houses primarily in the southern United States.

• Legacy Housing's growth in consumer and MHP loan portfolios, with increased interest income expected in future, indicates potential for increased revenue and earnings growth.
  
• Improvements in community business and increased inbound requests for large orders signal potential revenue growth, especially with an expected increase in park model home demand due to higher interest rates.
  
• Focus on ramping up production at Texas and Georgia facilities, alongside a healthy backlog and planned price adjustments, could enhance revenue growth and margins.
  
• Initiatives in land sales and development, especially in strategic areas like Austin, suggest potential additional revenue streams and margin improvement from land monetization.
  
• Share repurchase plans and maintaining a strong net cash position could enhance shareholder value and increase earnings per share (EPS).

Legacy Housing Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Legacy Housing's revenue will grow by 6.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 33.5% today to 33.3% in 3 years time.
• Analysts expect earnings to reach $73.1 million (and earnings per share of $2.98) by about March 2028, up from $61.6 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 13.3x on those 2028 earnings, up from 10.2x today. This future PE is greater than the current PE for the US Consumer Durables industry at 10.2x.
• Analysts expect the number of shares outstanding to decline by 0.77% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.13%, as per the Simply Wall St company report.

Legacy Housing Future Earnings Per Share Growth

Risks

• The decrease in product sales by $15.8 million or 10.9% in 2024 indicates potential challenges in unit volume shipped and direct sales, which could adversely impact future revenue growth and net earnings.
  
• Gross profit margin decreased from 31.3% in 2023 to 30.4% in 2024, potentially due to under-absorbed labor costs given lower production levels, impacting overall profitability and net margins.
  
• The heavy reliance on selling non-core land assets to boost revenue could indicate a lack of sustainable operational revenue sources in the long term, affecting consistent net income generation.
  
• Despite an increase in net revenue per product sold, the market noise and uncertainty, including political and economic factors, pose potential risks to future revenue stability and the ability to maintain net margins.
  
• Rising interest rates and possible changes in immigration policies could affect consumer affordability and demand, as well as labor costs, which might impact future revenue, production efficiency, and net earnings.

Valuation

• The analysts have a consensus price target of $33.5 for Legacy Housing 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 2028, revenues will be $219.7 million, earnings will come to $73.1 million, and it would be trading on a PE ratio of 13.3x, assuming you use a discount rate of 8.1%.
  
• Given the current share price of $25.93, the analyst price target of $33.5 is 22.6% higher.
  
• 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.