An Undervalued Housing Play for Recovery Believers

Kyle Hartman's picture

Wednesday, July 15, 2009 - 6:27pm

by Kyle Hartman

Manufactured home builder Palm Harbor Homes (Nasdaq: PHHM) said it lost $10.0 million, or 44 cents a share, in its fiscal first quarter, compared with a loss of $0.5 million, or 2 cents a share, a year ago.

Revenue fell -36.6%, to $82.4 million, from a year ago. The company cited weak demand for factory-built homes in Florida, Arizona and California for the decline.

Palm Harbor sold a total of 729 homes this quarter, 556 manufactured and 173 modular. The manufactured homes, commonly called mobile homes, sold for an average price of $70,000, a fraction of the nation's $169,100 median home price. So-called "modular homes," which Palm Harbor also sells, are built in segments in a factory and shipped to a home site for assembly. They cost an average $169,000.

Management has cut Texas-based Palm Harbor's administrative costs 22% from year-ago levels to conserve cash. The company now has $22.3 million in cash on hand, nearly twice what its books showed in the year-ago quarter.

Palm Harbor sales are a proxy for affordable housing and reflect consumer confidence for lower-income households. As the economy rebounds and unemployment rates fall, PHHM will see renewed demand -- one reason the company is keeping inventory levels constant. As it stands, shares are down -55% for the year.

Judging from their stock prices, prospects have improved for some traditional homebuilders, which were all but obliterated in 2008. Hovnanian Enterprises (NYSE: HOV), for example, has gained +39.0% since Jan. 1; Beazer Homes (NYSE: BZH) is up +30.0%.

Manufactured homes sales will lag as the recovery appears and then reaches the lower spectrum of the housing market. The market is already pricing this recovery into some of PHHM's larger competitors: Skyline Corp, (NYSE: SKY) is already up +14.6% so far this year; Cavco (Nasdaq: CVCO) has clocked a 14.2% gain. But Palm Harbor, which is a little smaller and less geographically diverse than its rivals, will catch up.

For long term investors, Palm Harbor offers the chance to get in on and extend the advances that homebuilders and other manufactured housing companies have already achieved.

Kyle Hartman does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.