CAVCO INDUSTRIES, INC.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

Cavco Industries is a manufacturer of factory-built housing, including wholesale and retail factory-built housing operations, and financial services, which includes manufactured housing consumer finance, commercial finance and insurance,

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Cavco Industries, Inc. (CVCO) is a leading manufacturer of factory-built housing, operating primarily in the U.S. It also offers financial services such as consumer finance and insurance to its customers. The company has two segments: Factory-built Housing and Financial Services. The company’s operations are heavily concentrated in the US, with manufacturing facilities in Arizona, New Mexico, Texas, Florida, etc., and retail stores primarily in Texas, North Carolina, and several other states, with the largest number of stores in Texas. They are a significant player in the manufactured housing industry.

Business Overview:

The Company primarily operates in the factory-built housing market, offering a range of products, including:

Factory-Built Housing: This segment encompasses the design, production, and distribution of manufactured homes, modular homes, park model homes, and cabins. They utilize a network of independent retailers, builders, communities, and developers to market their products. Revenue in this segment is driven by selling more units at a higher ASP.
Financial Services: This segment offers consumer loans and insurance products to customers financing the purchase of their homes, directly or through third-party lenders. Revenue is generated from fees, service charges, and interest income from these activities.
Revenue Distribution: The company generates most of its revenue from factory-built housing. They are geographically concentrated in the United States, with a strong presence in the Southeast region. Sales of factory-built housing units are largely driven by the new single-family housing market. The company is exposed to risks associated with material costs, pricing pressure and consumer demand.
Financial services revenue is driven by fees, service charges, and insurance premium income, but also linked to the home sales.
Industry Trends: The manufactured housing industry is cyclical, influenced by factors like interest rates, material costs, and consumer spending. It also is highly competitive with a wide range of competitors.

Margins:

As of 2023, Gross profit margin was 25.6% in the factory built housing segment while the financial segment is higher at 50.4%.
Gross margins for factory-built housing have been negatively affected by the sharp increase in building material costs.
The company’s ability to maintain or improve margins will significantly influence the long term profitability.

Competitive Landscape

The manufactured housing industry is highly competitive and fragmented, with numerous manufacturers and retailers competing for market share.
Competition is primarily based on price, product features, service, quality, and brand reputation.
Local regulations, access to funding, and consumer preferences can affect the competitive dynamics of the industry.

What Makes CVCO Different

A vertically integrated model, including manufacturing and finance arms
A history of product innovation
An emphasis on ESG efforts

Recent Concerns / Controversies and Problems:

Impact of Macroeconomic Conditions: As seen in recent earnings calls, rising interest rates and inflation are impacting the demand for new homes, affecting the performance of the factory-built housing segment. There also is mention of a slowdown in orders.
Supply Chain Issues: The company has been experiencing supply chain disruptions, mostly impacting the delivery and pricing of raw materials, that impacts operations and profitability.
Labor Shortages: Like many other businesses in the current environment, a shortage of workers is impacting costs and productions.

Management’s Response:

To combat these issues, management is looking to lower costs, manage supply-chain difficulties, provide programs to address the need for affordable housing, and innovate in design to produce cost-effective solutions.
To battle volatility in earnings, the company is looking to generate more recurring revenue from their financial segment
The company intends to continue investments in innovation and automation to enhance operational efficiency.

Financials

Revenues: In fiscal year 2023, the company achieved $2.15 billion in revenues, down from the highs in 2022 of $2.19.
- Most of the revenue comes from Factory built homes, however, that was down $24 million in 2023 year-end. The revenues from financial services were up 16% at $222 Million.
Operating Expenses: Total operating expenses have increased from $462 million in fiscal year 2022 to $477 million in the year ended April 1 2023.
Net Income: The year-end net income was $157 million versus $197.6 million the year before. The net income from continuing operations was $158 million compared to $197 million last year.
- The company’s net income was up 54% year-over-year in the recent quarter. This is very likely to be a result of lower costs, the benefits of economies of scale, and one time items related to acquisitions and accounting.
Balance Sheet: Total assets came in at $1.74 billion in April 2023. Total equity for the company is $1.01 billion. The company has $446 million in cash or cash equivalents.
Ratios: The company has a good current ratio of around 3.3 (Current assets/Current Liabilities), a debt/equity ratio of around 0.5, and an average return on equity of around 17% in the last 5 years.

Free Cash Flow The company has a healthy free cash flow of roughly 150 million in the last year, but can vary greatly.

Moat: 2 / 5

Limited Moat: While CVCO has some competitive advantages, they are not strong enough to warrant a high moat rating. The company’s brand recognition in the industry is very regional, and its products are not so unique enough to prevent imitation.
While there might be some switching costs for certain segments of their financials, that does not extend to most of their customers.
The company has a modest economies of scale, but this does not make them immune to competition, and that advantage might not be durable.
The company is exposed to fluctuations of prices of materials and that affects its costs of goods sold and therefore profitability.
The regulatory barriers are very low.
The company has struggled to increase returns over the years.

Risks to Moat and Business Resilience

Economic Sensitivity: The company is exposed to swings in the economy, which impacts the market for homebuilding and therefore its revenue. Rising interest rates can impact demand for houses and hurt the finance segment for the company.
Competition: As discussed above, the market is highly competitive and competition based on price can hurt the company.
Regulation While the government supports the manufactured housing industry, changes in regulation can increase costs or impact revenue.
Dependency on Key Suppliers: Supply chain disruptions could affect product availability and increase costs and delays. The raw materials they use, such as plywood and drywall can be affected by inflation and global events.
Consumer Sentiment: Given the big-ticket nature of its main products, the housing sales depend on how consumers view the future and the economy.

Understandability: 2 / 5

While the basic idea of manufacturing homes and financial services is simple enough to grasp, the complexity of the industry, coupled with all of the accounting aspects mentioned above, make it somewhat complicated for a non finance-trained eye. Also, analyzing the earnings calls would need some industry-specific knowledge as well.

Balance Sheet Health: 4 / 5

The company’s current ratio is above 2, implying it has a healthy liquidity.
The company is not over-leveraged, giving the capacity to take on more debt, if needed.
The company is not generating a lot of free cash flow, but they have strong cash reserves.
Overall, the company has a solid and healthy balance sheet.