Outlook For Manufactured Housing

by: The Wall Street Transcript

On September 24, The Wall Street Transcript interviewed Robert E. Robotii, President of Robotti & Company, LLC, a registered broker- dealer and President of Robotti & Company Advisors, LLC, a registered investment advisor. Key excerpts, including his outlook for manufactured housing, follow:

TWST: Are you finding interest in this space at this point on the part of investors?

Mr. Robotti: There is some interest, but it is limited. For one thing, every one of these companies is a small cap, so institutional interest is very limited. It's the rare investor who will go out of their way to see things differently. That said, there's enough speculative, trading-oriented money that continues to trade in and out of these stocks. I think we are seeing less interest this year than in prior years. Our second conference had the highest attendance; the stocks on average were up 35% that year. There is nothing like investment success to draw investor interest. These stocks have not been successful recently and that has diminished some of the interest this year.

: Are there names investors should be looking at, at this point?

Mr. Robotti: I hate to say this, but the companies that are left clearly have weathered horrible industry conditions, and I think that pretty much every one of them is a survivor. Going forward, I think their success in large part is predicated on the industry improving. Some companies may be better positioned in one way or another - such as geography or a product segment. Of course, it will be dependent on when the recovery occurs, and there may be some serendipity in terms of who benefits the most. That said, of course, one of the main benefactors of the industry conditions clearly is Clayton Homes, a Berkshire Hathaway (NYSE:BRK.A) company. Given their commitment to the business, their understanding of the business, and given Berkshire's balance sheet, they certainly have the liquidity to take advantage of these difficult times. Clayton has continued to pursue opportunities in the business. For example, one of the companies that had attended our conference regularly (and was also one in which we invested) was a Pink Sheet company, Southern Energy (OTCPK:SSEZY). We identified it as a well-run company that had a niche business. Last year Berkshire bought that company, too. So they continue to pick things off here. The combination of Berkshire's capital and Clayton's industry savvy gives them an industry-leading position. Of course, there is really no way for public investors to really play that because the Clayton component of Berkshire is de minimis.

TWST: Do these companies that have survived this tough period have the balance sheet to continue and get through what's still going on?

Mr. Robotti: Plenty of the balance sheets today are debt-free. You can run through the list: Cavco (NASDAQ:CVCO), Skyline (NYSEMKT:SKY), Nobility (NASDAQ:NOBH) - all companies with no debt and significant cash. In the case of Skyline, half of the market cap of the company is backed by cash on the balance sheet. So the enterprise value of the business is half of its market cap. That's probably the extreme. Cavco next and Nobility behind it - all companies with very clean balance sheets and huge amounts of excess capital. Even Cavalier Homes (CAV) normally has net cash on the balance sheet, but it's clearly a smaller player with relatively marginal results. The one with the most debt of course is still Fleetwood (FLE), but I think they have done a reasonable job and have managed the debt well while cutting costs and capacity to improve on profitability. Of course, Fleetwood is a little different in that it has the two segments: RV and manufactured housing. However, neither is giving them any benefit today since the RV business is also going through trying times. But those two different businesses are relatively valuable franchises.