The construction industry is among the industries categorized as cyclical and as such, can be greatly impacted by the condition of the economy and existing weather as well. This means that if the economy is good, there is visible increase in the performance of a cyclical company but when it is not, it becomes a different and negative story altogether.
Cavco Industries, Inc., (NASDAQ:CVCO) operates in a cyclical industry. It is a Phoenix, Arizona based company that specializes in the building of manufactured and modular homes, vacation cabins and park model homes in the U.S. Right from its inception in 1965 till date, Cavco Industries has not looked back as far as quality and valuable service is concerned. With the release of the company's financial results for the fiscal Q4 and year ended March 30, 2013, it showed that although the company's sales increased, there was a decrease in net income in comparison to the same period a year ago. It was the same for the gross profit margin.
The company, whose stock closed on July 8, 2013 at $51.06, offers "systems-built" homes under varied trade names. These homes come in various styles, floor plans and of course, price ranges. Most of the homes are built as per a customer's specifics and budget. Cavco Industries maintains 15 home building facilities which are strategically located in several regions, including South Central, Pacific, Mountain and South Atlantic regions.
In its distribution channel, Cavco Industries has 53 company-owned retail outlets. It also maintains a distribution network of not less than 1,029 independent retail outlets spread across 40 states of U.S. including Texas, California, Arizona and Florida which makes up 45% of the retail outlets. The remaining 55% retail outlets are spread across 36 other states and Canada, Japan and Mexico.
Cavco Industries Inc., operations
The company's operations covers not just residential property needs but commercial as well. Over the years, it has built commercial modular structures, condos, hotels, schools and even housing for U.S. military troops. The company has also built homes that make use of alternative energy like wind and solar. From its report for the fiscal year 2012 that ended on March 30, 2013, the company was producing approximately 46 sections per day and sold 7,860 homes.
Recently, the company took on another dimension to its business - providing a credible source of financing for homebuyers. The company is doing this through its subsidiaries. In order to further spread its tentacles as far as operations are concerned, Cavco Industries announced on June 14, 2013 that it has entered into an agreement with Fleetwood Homes, Inc. This agreement will see Cavco Industries buying the remaining 50% ownership of Fleetwood Homes as it previously held a 50% ownership.
The financial results of Cavco Industries for Q4 of fiscal 2013 showed net revenue of $108.8 million. This shows a 9.4% increase in comparison to the previous fiscal year's Q4 revenue of $99.5 million. The result also showed the income before taxes for the quarter to be $4.2 million as against the previous year's Q4 $2.4 million income before tax. For net income, the company had $3.0 million.
Net income attributable to the company's stockholders for Q4 was $1.4 million while net income per share based on basic and diluted weighted average shares is put at $0.20. The $452.3 million net revenue for the fiscal year ended March 30, 2013 showed a 2.1% increase in comparison to the net revenue for the previous fiscal year. Overall net income attributable to the company's stockholders for fiscal year ended 2013 was $5.0 million in comparison to the previous fiscal year's $15.2 million.
In terms of net income, especially in comparison to the company's performance in the same quarter of the previous fiscal year, the S&P 500 and the Household Durables industry average, the company underperformed. The net income for the quarter was $1.39 million, a decrease of 15.8% when compared to the net income of $1.65 million from the same quarter in the previous fiscal year. However, Cavco Industries maintained a P/E ratio of 68.2, which is far above the S&P 500 P/E ratio of 17.7.
Talking about the company's stock, in comparison to the same quarter a year ago, it is up even though it lagged the appreciation in the S&P 500. With the uptrend of the stock and the level it is, it is assumed to be expensive, especially when compared to its peers but when you analyze other strengths of Cavco Industries, the higher price level begins to make sense. As of the close of business on July 8, 2013, the shares of the company was up by 0.73%
Cavco Industries debt-to-equity ratio being 0.47 is on the lower side and below its peers' average. This goes to show that the company's management has done a good job of efficiently managing the company's debt levels. With a current quick ratio of 1.20, it reflects that the company can efficiently cover or avoid short-term cash issues. Also, with the increase experienced in the company's liquidity from the same quarter in the previous fiscal year, it is a clear indication of improved cash flow.
From the same quarter the previous fiscal year, stockholders' equity grew by 5.07%. This goes further to strengthen the premise that the company will have little or no financial difficulties in the near future. With its current P/E ratio of 72.66, which is higher than the industry average of 29.68 and S&P 500 average of 18.67, it points to higher growth expectations for the company and investors alike. Little wonder why it has been continuous streaks of Buy and Hold for the company's stock.
One outstanding risk that has always stared the construction industry in the face, especially those in the homebuilding sector, is a harsh economy. In order for Cavco Industries' sales to improve further, the economy needs to be stable. High unemployment and underemployment rates are impediments the company will contend with when the economy is down. When the general populace are concerned about financial stability, it makes them hesitant as far as committing to a new home purchase is concerned. However, with improvement in consumer confidence levels, there is sure to be a rise in demand for manufactured homes, condominiums and cabins.
Finance being the major issue, is one of the reasons why Cavco Industries went the extra mile to provide credible source of financing for intended homeowners. With this measure, people are more likely to buy instead of renting homes.
Cavco Industries' stock has maintained an uptrend, mimicking the improving economy as is synonymous with cyclical stocks. With its focus no longer just on building manufactured homes but also helping customers to obtain financing for their dream homes, the company is set to make the most of these opportunities. Overtime, it is inevitable that the company will experience a surge in its revenue in the following quarters. Add these to the increase in the company's liquidity and you have a good company to invest in for the long term. For me, it is a Buy recommendation.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.