S2E27 – Cavco Stock Review

Cavco Stock Review Transcription

[00:00:00.130] – Sean

Hey. In this video, I’m going to review Cavco industries. So you may be wondering, who is Cavco and why should I care? Every once in a while I like to review some stocks we’re not familiar with. There’s a lot of people out there always reviewing the same old main stocks or fang stocks where used to.

[00:00:15.850] – Sean

But there are always diamonds in the rock. So with Cavco, we’re going to dive into the business model in the industry a little bit, which is the home building industry, and show why this could be a stock worth paying attention to. Let’s dive in.

[00:00:33.150] – Sean

So with a four M analysis, we’re going to keep this pretty short on the margin of safety. That’s the first M. And then we’re going to spend a little more time with the Meaning notes and the management, especially the Meaning section. So with the financials, this is something that caught my attention right away. I always like to start with Tykr first to see what the financials look like.

[00:00:51.040] – Sean

We’ve got 89 out of 100, which is really good. And the margin of safety we can see here, the share price is 238 and the fair value is just over $200. Margin of safety is 90%, which shows a lot of upside potential. If you scroll down to the section here, you can see the ROI cups. Growth rate, equity growth rate, sales growth rate, all look fantastic.

[00:01:15.420] – Sean

They’re perfect. The cash growth could be a little better, but overall it hasn’t made a big impact and negative impact on this business. Again, 89 of 100 is really good on sale. And Tykr, we’re looking for 50 or higher. In this case, 89 is outstanding.

[00:01:31.840] – Sean

So financials looking really good. Let’s move on to the Meaning. This is what really peaked my attention with this business. So just to take a step back, capital was founded in 1965. They originally built truck camper covers and trailers, essentially travel trailers.

[00:01:51.940] – Sean

So they’ve since then evolved into a much bigger business. And I want to talk about the three main revenue streams. First off, you have manufactured homes which are mobile homes. The average cost in the United States for a custom home today, or any home, you go out there and you’re looking to buy a home, especially if you’re a first time home builder or home buyer, I should say. You know, it’s pretty difficult.

[00:02:13.430] – Sean

The average cost in the United States is about $450,000. That’s pretty ridiculous. And I’m going to get into some numbers on a little bit, but where Capital comes in, this could be a game changer. So first off, we have manufactured homes which are mobile homes. I know it doesn’t sound like the most glamorous product, but check this out.

[00:02:31.450] – Sean

A single wide mobile home is about $80,000. A double wide is about $150,000. So with these homes, they’re completely manufactured within a factory, sent to the location and they can pretty much they’re off and running like you just make your connections to electric and plumbing and whatnot and you’re good to go. So again, I get it probably not the most glamorous product for most people, but where things get really interesting is the next category, which are modular homes. So module homes are like sections of home pre built in a factory.

[00:03:06.230] – Sean

They are sent to the location and put together. So for comparison, like if you were to build a custom home, it can take 912 months or longer, whereas a module home can be set up. I did some homework here, I saw some ranges in timeline. It can be like three months, six months, sometimes a little longer, sometimes shorter, but it’s really fast. They’re a very efficient product to put together.

[00:03:32.210] – Sean

They’re also pre wired and already set up with modern technology. So for example, I have a home that was built in 1999. I’ve gone through the process to do a lot of wiring and set up a home. So it’s a smart home, but it took some work. And of course it’s an older home from 99.

[00:03:49.950] – Sean

These homes, they got everything pre built, already set up, which is that’s outstanding. That’s what people are looking for. So this is where things get really fun is with the prices. A one story module home with square footage here it’s between 801,500, between 40,000 and $113,000. That’s crazy.

[00:04:12.750] – Sean

If you go to a two story, that’s plenty of space. You’ve got 1500 to 2500, can range in price between 75,180 $8,000. I can’t believe the cost of these homes compared to not a brand new home, but a home in general being 450. And then you’ve got three storey homes here, which are again, this is plenty of space. You’ve got 2000, 3500 sqft can range in price from one hundred and fifty thousand dollars to two hundred and sixty three dollars.

[00:04:44.060] – Sean

So where I see the market going with these module homes and the reason is why we’re having this issue with homes today is back in 2008 with the big housing crash and essentially the great recession, the home building market slowed down. But one thing that did not slow down is people making more people reproduction. So now you have all these people out there looking for homes. They have nowhere to move into the rental team. So we do need more homes built.

[00:05:13.670] – Sean

There’s no ifs, ands or buts about it. We do need it. And that’s where a company like Cavco, and we’re going to talk about the competition in that they can all thrive because they can quickly build and get to on site locations, get these homes in place so families can start moving in. And this is really where the future is going. And we’re going to see these monstrous custom homes being built in mass.

[00:05:37.430] – Sean

Probably not. That’s probably going to slow. It’s this type of product that has got the efficiencies, the tech, the modern day attributes. We’re looking for as a consumer already built into the product. It’s really smart.

[00:05:50.670] – Sean

The third revenue stream in this model, you’ve got the park models, which relate to their earlier days with Campers and so on and so forth. So they got RV cabins and these park models, they range in price between thirty k and eighty k. I’ve been to some of these resorts, you could call them where you can camp there. But you also see these little tiny cabins already set up and people just pretty much they move them there. They keep them there all year round, although they might not use them for the entire year.

[00:06:20.120] – Sean

They might just use it between, especially in the northern states. We’re talking between May and September. They’re going to be using these products, but they range in price between 30 and 80 kwh, which is also very affordable. They do some commercial structures. I saw they have mortgage lending, another revenue stream, and insurance.

[00:06:38.930] – Sean

I think that’s a great bolt on revenue stream to each of the construction revenue streams. Mortgage insurance, always a great way to go. So overall, I’m really impressed with the meaning of this business. And I do see some demand. I of course, went into the news to see what other people are saying about this industry.

[00:07:00.090] – Sean

So there’s a lot of good signs here. Like Zach is saying, this is a strong by seeking alpha. Also the same thing. But I did dive into I’m looking here, it’s from Bedrockcommunities.com, talked about our manufactured homes, the future of housing and owning a manufactured module. Home includes less maintenance, more energy efficiency, lower prices, and improved technology.

[00:07:30.920] – Sean

So really everything I talked about before, especially the technology component, is a big benefit. So as fast as the world population is growing, and we know here in the US. It’s growing very quickly, we need homes for more people. And a company like Havco can meet that need. Here’s something interesting.

[00:07:49.600] – Sean

I was just curious to see what are the home price cost way back in the day? So 1965, the average home price get this was $21,000. That’s $194,000 and $2,022. Really interesting. Then what I did is I took five year increments to just give ourselves a little perspective on what prices look like.

[00:08:10.510] – Sean

So 1970s, $26,000. I’m going to go here to the average home price was $76,000. 1990 is 152,000 is 207. 2010, it was 2072, 2000 and 2390. So things really started getting a little outrageous the last two years.

[00:08:32.200] – Sean

We could see the housing market cool off a little bit. So it might be a little easier for new home buyers to get into a home. But I still strongly believe the population growth is growing too fast. We can’t be dependent on custom homes. I think custom home builders will always be there.

[00:08:50.620] – Sean

But we need companies like Capital to produce more homes and mass. I took a look at the competition. This was interesting. We’ve got LCI industries and then Skyline again, not very common companies, but you’ve got LCI is on sale at 78, and then they’ve got a margin of safety at 90. And then Skyline, they’re looking pretty good too.

[00:09:15.610] – Sean

They’re currently watch. So with this business model, you look at the numbers, you’ve got the math, the margin to see if you’re looking really good, you’ve got the meaning. The business model is really poised for success in the future. And then the moat. I’m not going to spend a lot of time there.

[00:09:33.300] – Sean

Anybody that’s in this space? These modular homes, mobile homes, nice. But I think the module homes route to pre built components in a factory, sending them to on site locations and getting them set up quickly for families, that’s a great place to be in this world. I think that’s excellent. All right, the last step here is the management.

[00:09:53.730] – Sean

So the current CEO is Billboard. He has a unique background here that really jumped out at me. So he served as President and CEO since 2019. Prior to Cavco, he was actually CEO of Great Lakes Brewing from 2015 to 2019. So a beer company, essentially.

[00:10:13.850] – Sean

And I will say I’m actually a big fan of their beer. Any IPA fans or Porter fans out there? Highly recommend. I thought that was really interesting. So then we get down to some of the previous roles.

[00:10:27.060] – Sean

He’s been in leadership roles at Cliffs Natural Resources. Ego materials. Procter and Gamble is probably the biggest company who worked at but he’s got a really diverse background and I like that. This is one reason why I like really well experienced consultants that have worked in multiple industries. You can kind of pull together the pros and cons on how to market, how to sell, how to scale different businesses, what works, what doesn’t work.

[00:10:55.210] – Sean

And that diverse background can help you. You jump into a new organization, you can realize, okay, so this is a manufacturing company. We’re sourcing products from this location, whether it’s home building industry. You got wood, you got plastics, you got metals. Okay, where are we getting all that, how do we assemble it?

[00:11:12.500] – Sean

And that experience, that’s really sound. I also, for some reason, having that brewery experience that jumps out at me. That gives me the perspective that this guy, he likes to kind of do things that are almost hobbies, right? He’s not just in it for the money. He wants to work on business because he’s passionate about the business.

[00:11:35.910] – Sean

I would love to actually have him on the podcast sometime. I think he’d be a fun character, what worked and what didn’t work in some of the industries he’s worked before. But he seems like a good guy overall. He’s done very well with this company Cavco. Their financials looking outstanding.

[00:11:53.160] – Sean

I think the company is poised for success. So when you take a step back and you look at this entire business, I think all four ends check the boxes, margin of safety. Again looking really strong with the financials. The meaning that’s probably the strongest just because of the demand of the population growth. We need homes.

[00:12:12.510] – Sean

The moat I’m actually not concerned about at all. There are a few other competitors with weaker financials than Cavco. But I think all competitors that are creating these module homes, I think they’re going to see some great opportunity in the future. And then the management, I think Bill is doing a great job. So again, this is one of those companies like I said in the beginning, you probably haven’t heard of, but I’m going to try to do more of these kind of diamonds in the rough if you will, that could be poised for some big success in the future.

[00:12:42.000] – Sean

And I will say this is a homebuilding company. So is it going to see the exponential growth of like a tech company? Those that don’t know me know that I hold mostly tech, pretty much all tech in my portfolio because it can scale really fast. A company like this, it may not scale, may not see those big share price returns, but it’s a great stock that may kind of round up your portfolio a little bit if you want to diversify. If you got a lot of tech like me and you want to mix it up, this might be a good choice.

[00:13:12.450] – Sean

So again, might be a stock worth paying attention to at least throwing your watch list. Let’s keep an eye on it. But the way things are going with the homebuilding industry, we do need a better price point for, especially the new home buyers to get into. Hopefully this video was helpful. If any feedback please let me know.

[00:13:31.270] – Sean

And if there are any stocks you want me to take a look get, just leave a message and I’ll take a look. Thanks.