Construction Stocks

Cavco Industries Inc Valuation – September 2018 $CVCO

Company Profile (excerpt from Reuters): Cavco Industries, Inc., incorporated on January 14, 2003, designs and produces factory-built homes. The Company operates through two segments: factory-built housing, which includes wholesale and retail systems-built housing operations, and financial services, which includes manufactured housing consumer finance and insurance. The Company’s factory-built homes are primarily distributed through a network of independent and the Company-owned retailers, planned community operators and residential developers. The Company markets its products under the brands, including Cavco Homes, Fleetwood Homes, Palm Harbor Homes, Fairmont Homes and Chariot Eagle. The Company is also a builder of park model recreational vehicle (RVs), vacation cabins and systems-built commercial structures, as well as modular homes built primarily under the Nationwide Homes brand.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of CVCO – September 2018

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $2,291,046,820 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 2.44 Pass
3. Earnings Stability Positive EPS for 10 years prior Fail
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 771.15% Pass
6. Moderate PEmg Ratio PEmg < 20 44.84 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 4.92 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 2.44 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.13 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Fail
5. Earnings Growth EPSmg greater than 5 years ago Pass

 

Stage 2: Determination of Intrinsic Value

EPSmg $5.63
MG Growth Estimate 15.00%
MG Value $216.93
Opinion Overvalued
MG Grade C-
MG Value based on 3% Growth $81.70
MG Value based on 0% Growth $47.89
Market Implied Growth Rate 18.17%
Current Price $252.65
% of Intrinsic Value 116.46%

Cavco Industries, Inc. is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings stability over the last ten years, and the poor dividend history, and the high PEmg and PB ratios. The Enterprising Investor is only concerned with the lack of dividends. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $1.86 in 2015 to an estimated $5.63 for 2019. This level of demonstrated earnings growth does not support the market’s implied estimate of 18.17% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Cavco Industries, Inc. revealed the company was trading above its Graham Number of $90.95. The company does not pay a dividend. Its PEmg (price over earnings per share – ModernGraham) was 44.84, which was above the industry average of 25.8. Finally, the company was trading above its Net Current Asset Value (NCAV) of $22.81.

Cavco Industries, Inc. receives an average overall rating in the ModernGraham grading system, scoring a C-.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) $22.81
Graham Number $90.95
PEmg 44.84
Current Ratio 2.44
PB Ratio 4.92
Current Dividend $0.00
Dividend Yield 0.00%
Number of Consecutive Years of Dividend Growth 0

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Most Recent Balance Sheet Figures

Balance Sheet Information 6/1/2018
Total Current Assets $429,237,000
Total Current Liabilities $175,626,000
Long-Term Debt $33,884,000
Total Assets $693,561,000
Intangible Assets $82,936,000
Total Liabilities $217,874,000
Shares Outstanding (Diluted Average) 9,267,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $7.27
Mar2018 $6.68
Mar2017 $4.17
Mar2016 $3.15
Mar2015 $2.64
Mar2014 $1.94
Mar2013 $0.71
Mar2012 $2.19
Mar2011 $0.41
Mar2010 -$0.52
Mar2009 $0.07
Mar2008 $0.95
Mar2007 $1.74
Mar2006 $2.23
Mar2005 $1.54
Mar2004 $0.97

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $5.63
Mar2018 $4.45
Mar2017 $3.06
Mar2016 $2.38
Mar2015 $1.86
Mar2014 $1.29
Mar2013 $0.84
Mar2012 $0.81
Mar2011 $0.25
Mar2010 $0.42
Mar2009 $1.02
Mar2008 $1.50
Mar2007 $1.61
Mar2006 $1.35
Mar2005 $0.77
Mar2004 $0.32

Recommended Reading:

Other ModernGraham posts about the company

6 Best Stocks for Value Investors This Week – 3/26/17
Cavco Industries Inc Valuation – Initial Coverage $CVCO

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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