Is Cavo Industries Stock Fairly Valued or Undervalued?

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Written By Kevin MacDonald

Cavco Industries, a leading designer and producer of factory-built housing products, has reported its full FY2024 results, revealing continued weakness due to persistent high interest rates that have impacted the housing market.

However, the company now anticipates a more optimistic revenue outlook for upcoming quarters, despite not providing specific guidance. Management has observed a recent uptick in orders, signaling potential recovery.

Financial Performance and Future Outlook

Credits: DepositPhotos

Cavco ended FY2024 with a revenue decline of 11.8% in Q4 and reported an operating income of $37.6 million, down 30.7% from the previous year’s Q4, with a sequential decrease of $2.1 million.

The ongoing demand slump has not yet stabilized, as the housing market remains weak amid high mortgage rates, which crossed 7% in April.

For the entire FY2024, revenues declined by 16.2%, and operating income dropped by 40.5% to $177.3 million, maintaining a healthy margin of 9.9% despite industry challenges. This demonstrates that while recovery may lead to higher earnings, Cavco’s operations have remained robust throughout the adverse conditions.

Looking ahead, Cavco expects sales volumes to improve. CEO Bill Boor communicated in the Q4 press release that the company has resumed 5-day operations in most plants due to increased orders.

During the Q4 earnings call, Boor expressed confidence in the improving order situation, with wholesale orders picking up from early 2024. The order backlog improved by $31 million to $191 million sequentially in Q4, suggesting a potential rebound in FY2025.

However, the sustainability of this recovery remains uncertain, given the persistent uncertainty around interest rates and macroeconomic conditions.

Long-Term Performance Compared to Peers

Cavco’s long-term performance aligns with publicly traded homebuilders such as M/I Homes (MHO), Green Brick Partners (GRBK), Century Communities (CCS), Tri Pointe Homes (TPH), and Dream Finders Homes (DFH).

Over the past five years, Cavco’s revenue growth has been consistent with these peers, though the recent year-over-year growth of -16.2% trails the peers’ median of -8.4%. This discrepancy is primarily due to Cavco’s higher growth in late 2022 to 2023, resulting in stronger comparison figures.

The EBIT margin trajectory has also been similar among these companies, although Cavco currently posts the weakest margin at 9.9% compared to the peers’ median of 11.9%. Despite a more dramatic recent downturn, Cavco’s performance should start to improve in FY2025 alongside revenue growth.

Valuation Analysis

In recent months, Cavco’s stock has traded at a premium to its peers, with a trailing EV/EBIT of 14.8, significantly higher than the peers’ median of 7.6. This premium reflects market confidence in Cavco’s long-term growth prospects.

However, the investment does not appear as attractively valued compared to its peers.

A discounted cash flow (DCF) model updated from previous estimates places Cavco’s fair value estimate at $408.76, about 15% above the current stock price. While this is an increase from the previous estimate of $350.38, the higher stock price now indicates less upside potential.

Given that Cavco’s valuation is above its peers, the current investment does not offer a particularly attractive risk-to-reward ratio.

The DCF model uses a weighted average cost of capital (WACC) of 10.40%, down from 11.84% previously. This WACC is derived from a capital asset pricing model (CAPM), which includes the U.S. 10-year bond yield of 4.25% as the risk-free rate and an equity risk premium of 4.60% (Professor Aswath Damodaran’s latest estimate).

The beta estimate remains at 1.25, with a liquidity premium of 0.4%, resulting in a cost of equity and WACC of 10.40%.


Credits: DepositPhotos

Cavco’s financial performance has shown resilience despite high interest rates, maintaining healthy earnings and cash flows. While the company’s long-term performance aligns with peers, it has recently trailed slightly due to higher comparison figures.

The company has started to see a recovery in orders and expects improved sales in FY2025.

However, the current valuation is above may be slightly above its peers. Therefore, investors may want to wait for a more attractive entry point before buying shares.



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