A Prefabricated Future?

by: Judy Weil

The housing crisis is far from over, but there are some sectors in the industry that could emerge stronger when it ends. Buyers are downsizing and homebuilders like KB Homes (NYSE:KBH) are focusing on smaller floor plans. Homebuyers are looking for lower expenses, easier upkeep and more environmentally-friendly solutions. Even luxury ‘McMansion’ builder Toll Brothers (NYSE:TOL) is offering smaller home models to meet market challenges.

In the same vein, it could well be that manufactured housing firms like Champion Enterprises (CHB), Fleetwood Enterprises (FLE), Palm Harbor Homes (PHHM) and industry-related firms like Patrick Industries (NASDAQ:PATK) will greatly benefit from the current downturn. Patrick manufactures and distributes parts for prefabs and recreational vehicles.

Shares in manufactured housing firms are down dramatically this year, and these firms are struggling along with the rest of the homebuilding industry. Fleetwood announced several plant closings this week. But manufactured housing is more environmentally-friendly. Their construction requires less materials, overhead and staff to manufacture. One article I read recently said the whole austerity thing could catch on as the new chic in these troubled times.

From Champion Enterprises’ Q308 conference call

The housing markets will eventually recover and affordable housing alternatives, which we have, will be more important in this next cycle as we compete on a level playing field with the site built. In the meantime, we will continue to develop alternate products in local markets with particular emphasis on multi-family and commercial project. In addition, while no longer at their peak levels of last year, our business units in Canada and the UK are solidly profitable, cash flow-positive and have not, and are not likely to see, the level of deterioration that we are experiencing in the US.

Champion executives also discuss the situation overseas:

In Canada, volume is starting to weaken somewhat from their peak levels of last year but this market is still very robust. Over 4400 units were shipped in the four western provinces in 2007 compared to a 20-year shipment average of 3100 units. Through the first nine months of this year, 3350 have been shipped and that in 2008 is expected to have the highest shipment level in over 25 years. Margins remained strong, aided by a lower Canadian dollar which is making this a less attractive market for US producers. Canada will continue to be our most attractive market for the foreseeable future.’

UK is struggling, but there will always be a market for manufactured housing:

The UK is also being hit hard by the financial crisis which is causing a slowdown in public spending. We have been notified that delays in several projects which will further depress revenues over the next three quarters. We have seen no cancellations, however, and the backlog remains strong at $235 million, below 27% of this backlog will not ship until after 2009. Even with the delays in public spending, the underlying demand for military accommodations, school, prisons, healthcare facilities, and student housing has not changed and will rebound when financing becomes available.