Manufactured Housing Seems Primed for a Bull Run

The bulls are pawing the ground at manufactured housing's corral. Recent gains in shipments of manufactured homes indicate that this sector is headed toward peak levels this year. For the eight months ending in August, manufactured home shipments totaled nearly 400,000 units, up by about 6% from the eight-month period in 2012.

Manufactured housing shipments have registered consecutive increases during the last three years, recalling this sector's boom years in the early '70s. Total annual shipments in the 2010-2012 period were registered at 500,000, 516,000, and 540,000, respectively, for an annual average gain of close to 4%.  

During the industry's heyday in 1973 a total of 579,960 units of manufactured homes were shipped, after which the sector went into a tailspin. Although there were pockets of recovery during the early 1990's, it was estimated that shipments plunged by over 50% between 1998 and 2002.   

Buffett saw it first
There are several viable stock plays in manufactured housing; one is Berkshire Hathaway . When manufactured homes were wallowing in the pits in 2003, Berkshire's guru Warren Buffett, true to his nature as a value investor, saw that it was an opportune time to acquire Clayton Homes, a large manufactured-home company based in Knoxville, TN.

Partaking of fortunes in the Buffett empire sure looks attractive, as it also encompasses lucrative positions in insurance, freight rail transportation, utilities, and energy generation and distribution. As ordinary retail investors know, however, this equity may be out of their league. It has a market cap of over $282 billion and currently trades with a trailing 12-month P/E at slightly under 15, which looks attractive. At its current price hovering around the $170,000 per share, however, Berkshire is prohibitively expensive for small investors.    

Small-cap choices
Instead, investors could start off with small-cap Cavco Industries . The factory-built homes of this Phoenix, AZ-based company are manufactured in 15 strategic locations across the U.S. It is a one-stop shop for prospective mobile home buyers who can purchase insurance products from Cavco's Standard Casualty and arrange various financing schemes from the company's finance subsidiary, Country Place Mortgage.

As of the first quarter of 2013, the company distributes its factory-built homes via 50 company-owned retail outlets and a network of about 980 independent distribution points in 44 states. It is also exporting to Canada, Mexico, and Japan, which is experiencing a resurgent housing market

Cavco posted robust gains in its fiscal 2014 fourth quarter. Driven by higher volumes, net revenue rose year-over-year by 17.9% to $129.8 million.

Net income attributable to stockholders rose to $4.3 million from $1.3 million for the same comparative period. Despite the fragile economic recovery and seasonally slow winter selling, Cavco is optimistic that its results will continue to improve. 

Patrick Industries  is another potential manufactured-home stock play. Its interests are diversified as well. Besides manufacturing and distributing building products and materials for manufactured homes, it also provides these inputs for the recreational vehicle (RV) industry. The company also provides certain materials for the industrial markets, such as laminated board and hardwood plywood. It has locations in 11 states, comprised of 16 factories and 14 distribution centers. 

Like Cavco, Patrick also demonstrated strength in its most recent quarter. Its net sales rose 29.8% to $146.6 million in the 2013 third quarter from a year earlier.

All its units delivered. Its manufactured housing sales rose by 16%, industrials by 25%, and RV's by 35%. Operating income rose 22.8% to $9.0 million in the third quarter.

All-season option
A position in Sun Communities also merits investors' consideration. This real estate investment trust (REIT) is the owner/operator of 185 manufactured housing and RV communities nationwide. These are located in 25 states with concentrations in the U.S. Midwest and Southeast. Its formerly seasonal operations (mainly Southern Florida and Texas RV communities) have become year-round businesses because of recent acquisitions.

In February, the company acquired 10 RV communities in Maine, Virginia, Connecticut, Massachusetts, New Jersey, Ohio, and Wisconsin, plus another one in New York in April. Its total portfolio occupancy rose to nearly 90% at the end of September. Further indicating strong tailwinds for the manufactured home sector, applications to live in Sun Communities rose 15% to more than 23,000, which drove the company's home sales up at a 14% clip during the third quarter.

Fundamental industry strengths 
Robust long-term demand for manufactured homes and their communities can be expected. Firstly, manufactured homes are typically lower-priced than site-built residences, and they are a preferred choice of the growing number of baby boomers entering retirement.  Older homeowners downsizing their dwellings and first-time home buyers constitute other major market segments for factory homes.

Second, factory-built homes have also significantly improved in style and quality in recent years. At the same time, their host communities' images have been improving. Some feature amenities found in traditional housing developments.

Final take
Lastly, the steady rise in prices of traditionally built residences adds immediate growth potential for manufactured homes. Notably, site-built homes in traditional communities are said to be increasingly going beyond the reach of America's working class and low-income groups. 

Affordably-priced factory homes are well-positioned to fill this gap in the low-end residential market. Financing facilities like Cavco's for manufactured homes have also become more available. Prospects are indeed bullish for Cavco, Patrick Industries, and Sun Communities, all of which deserve further due diligence.

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