The Next Big Play in Housing Stocks
Michael Brush
April 13th, 2005
Probably one of the last things any of us dream of doing in retirement is
devoting our golden years to rescuing a run-down company in the precarious
business of making trailer homes.
But that’s exactly the choice of Elden Smith – an industry veteran who
recently pushed aside the fishing poles and golf clubs to head Fleetwood
Enterprises (FLE),
a troubled producer of manufactured houses and recreational vehicles.
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At least Smith, who is 64, knows exactly what he’s getting into. Smith spent
his career at Fleetwood, retiring in 1997 as the head of the company’s
recreational vehicle group. Now he’s back to try to right a business that
faces some serious challenges.
On his way into the corner office, Smith picked up $900,000 worth of the
company’s stock for prices between $8.60 and $9.29 in March, according to
Thomson Financial. This kind of purchase would normally get a heavy
discount. After all, incoming managers typically buy as a show of loyalty
and enthusiasm. But three things make this purchase stand out, aside from
the fact that it’s a sizable chunk for someone heading a $474 million market
cap company.
Psyched for the job
First, Smith obviously has the knowledge and commitment to fix this
business. Not only did he come out of retirement to do the job, but he
offered running commentary on management during retirement, a sign he never
lost interest. “He came back because he has a true love for the company,”
says Robert Rodiguez, a portfolio manager at First Pacific Advisors, a value
shop that holds a big position in Fleetwood.
And since about the worse thing that can happen to Smith is that he will
lose his job and wind up back on the golf course, he won’t be afraid to make
the tough choices. Indeed, the new CEO didn’t take long. Shortly after he
came back, the company ousted its head of
manufactured housing. It also announced
plans to sell its manufactured housing retail and finance units, and
consolidate manufacturing facilities.
A rebound in the business
Next, there are finally signs of a turn around in the troubled manufactured
housing sector, says Robert Robotti
of Robotti & Co. Advisors, a New York-based money management firm and
brokerage specializing in small-cap value stocks. (Robotti
owns several stocks in manufactured housing, including a small position in
Fleetwood.) Wholesale shipments were essentially flat in 2004. But the
market was posting single-digit year-over-year increases by the end of the
year, says Robotti. January and February shipments were up 16.1% and 10.1%.
And dealer inventories were in decline by the end of last year. That’s a
sign the glut of mobile homes repossessed during hard times over the past
few years may finally be wearing down. Years ago, aggressive lenders in the
sector extended easy terms to too many people who couldn’t really afford the
homes. So many buyers had to give them up – which left excess supply on the
market.
Rising interest rates may actually help. As rates go up, people who had
hoped to buy a regular home will only have the buying power to purchase a
manufactured home instead.
It’s cheap
Finally, Fleetwood looks cheap. And it’s encouraging to see an ace value
manager like Rodriguez with such a large position. At end of the 2004,
Rodriguez owned at least four million shares, or
over 7% of the outstanding float. But he was buying more when the
stock fell below $10 from above $13 earlier this year -- after the company
released disappointing quarterly earnings news.
Rodriguez is worth watching because he has a solid track record. Over the
past five years his FPA Capital fund (FPPTX) is
up 14.19%, beating the S&P 500 by 16.82 percentage points.
How cheap is Fleetwood? It’s down there, even for a company in the
out-of-favor manufactured housing sector. At $9 per share, Fleetwood has a
price to sales ratio of .19. Competitors like Champion Enterprises (CHB),
Cavalier Homes (CAV),
Palm Harbor Homes (PHHM)
and Skyline (SKY)
trade for .39 to .71 times sales. And Cavco Industries (CVCO)
and Nobility Homes (NOBH)
have price to sales ratios of .99 and 1.61. These comps give you some idea
of where Fleetwood could go.
But here’s another way to look at it. “Over a three year time span,
Fleetwood should get to earnings power considerably higher than a dollar per
share,” believes Rodriguez. Put a forward price to earnings multiple of 13
on that, and you get a near double in two years for anyone buying in the
upper $8 range today.
Just remember, it will take time to see gains like those. For one thing,
dilution from the possible conversion of preferred stock to equity serves as
potential overhang later this year.
More importantly, deep-value turnarounds are always multi-year plays – not
for those on the hunt for a quick hit. “It will take a minimum of two years
to see what management will do and to see their policies unfold,” says
Rodriguez. As a value manager, he has no problem waiting that long for
positions to mature. Bottom line: That’s the kind of time frame you need to
have in mind if you buy Fleetwood shares today.
Disclaimer
At the time of publication, Michael Brush did not own or control shares in
any of the companies listed in this column. Mr. Brush is an independent
columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About
Insiders Corner:
http://www.investorideas.com/insiderscorner/. InvestorIdeas.com
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www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not
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