Cavco (CVCO)

Cavco (CVCO)

Is Cavco stock a good buy?

In this article, we review Cavco to determine if it’s a good buy, sell, or hold.

Cavco is a leading designer and builder of systems-built structures including manufactured homes, modular homes, commercial buildings, park model RV’s, and vacation cabins. They sell homes in the US and Mexico. They have about 6,000 employees and build about 18,000 homes per year.

Table of Contents

Tykr Rating

  • Summary: On Sale
  • Score: 89/100
  • MOS: 90%
  • Share Price: $210
  • Sticker Price: $1,057

Cavco Company History

  • In 1965 Cavco was founded as a truck camper and travel trailer manufacturer.
  • In 1965, soon after the company started, it changed its name to Cavalier Manufacturing.
  • In 1969, they began building mobile homes and selling those homes through mobile home dealerships.
  • In 1973, mobile homes became their primary focus.
  • In 1974, it changed its name to Cavco Industries.
  • In 1979, they began building modular homes. From 1974 through 1979, their revenue rose from $4.2M to $20.4M.
  • As the US entered a recession in the early 1980s and interest rose to 16%, Cavco’s revenues sustained but profits increased due to the introduction of lower-priced manufactured and module homes.
  • In 1986, the company began to manufacture relocatable modular structures used on construction sites. In the same year, they also introduced leasing which generated $3.4M from 418 construction site units.
  • In the 1990’s mobile home sales became stagnant which motivated Cavco to introduce a new product line. A park model was introduced which was less than 400 square feet. This provided to be a hot sell for Retirees looking to purchase a second home.
  • In 1990’s, Cavco obtained a $4M contract from Israel to provide 420 homes for Jewish Immigrants who left the Soviet Union. This prompted Cavco to help provide homes for other people around the world.
  • In 1996, Cavco merged with Centex Corporation, a large homebuilder and mortgage provider. Cavco would benefit from Centex’s expertise in subdivision development. In 1996, Cavco generated $130M in revenue whereas Centex generated $3B in revenue. 
  • In 2003, Cavco spun off from Centex and went public.

Inflation and Interest Rate History

The following information provides a comparison of how the rising inflation and interest rates today are similar to those of the early 1980s.

  • In 1970, inflation reached 5.5% and then continued to trend up to 14.4% in 1980.
  • Unemployment eventually reached 7% by 1980 and 11% by 1982.
  • Through the 1970s, economists and policymakers believed they could lower unemployment by throttling interest rates up and down, a strategy known as the Phillips Curve. The Phillips Curve is a “stop-go” process. During the “go” periods, the Fed lowered interest rates to loosen the money supply and target lower unemployment. During the “stop” periods, when inflation rises, the Fed would raise interest rates to reduce inflationary pressure. The Phillips Curve strategy proved unstable, as inflation and unemployment increased together.
  • President Ronald Reagan came into office in 1981 and introduced the Economic Recovery Tax Act of 1981. His plan was to lower taxes and help fuel the economy. The highest tax bracket went from 70% down to 50% and the lowest bracket went from 15% down to 11%. Unfortunately, the strategy of lowering taxes did not improve the economy and the Economic Recovery Tax Act of 1981 was reversed in September of 1982. This proved the point that raising or lowering taxes does not impact the overall economy because spending, saving, and tax behavior can vary per person. A more universal strategy needs to be applied which is where interest rates come in.
  • Fed Chair, Paul Volcker, (The Jerome Powell of the late 70s and majority of the 80s) calculated that raising interest rates was the only way to lower inflation. At the time, Congress pushed him to stop raising rates but he held his ground and said we must sustain higher interest rates for a long-term fix. By October 1982, inflation had fallen to 5 percent and long-run interest rates began to decline.
  • The recession lasted from July of 1981 to November 1982 and was considered the worst economic downturn since the Great Depression.
  • By comparison, as of June of 2022, inflation is 8.58% and mortgage rates are at 5.78%. Between 1960 and 2022, the average inflation rate was 3.8%. Between 1971 and 2022, the average mortgage rate was 7.77%.

Cavco Business Model

How does Cavco make money?

Cavco makes money by offering the following products.

Manufactured Homes – Also known as a mobile home that is built entirely in a factory. Cavco makes single-wide and double-wide homes. Below are options along with approximate retail prices. By comparison, the average home in the US costs about $450K.

  • Single-wide = $80K 
  • Double-wide = $150K. 

Module Homes – Module homes are parts of a house, known as modules, that are pre-built in a factory which makes for a more efficient assembly on-site. 

  • One-story (800 to 1,500 square feet) = $40K to $113K. 
  • Two-story (1,500 – 2,500 square feet) = $75K to $188K. 
  • Three-story (2,000 – 3,500 square feet) =$150K to $263K.

Park Models and RV Cabins – Similar to mobile homes, Park Models and RV Cabins are built in a factory and delivered on-site. They can range in price between $30K and $80K depending on the size. These are popular in resorts, campgrounds, and retirement communities.

Commercial Structures – Commercial structures include senior communities and multi-family complexes.

Mortgage Lending – Similar to a bank, you can obtain a mortgage loan from Cavco.

Insurance – You may purchase homeowners insurance through Cavco

Cavco News

This article from zacks.com states that Mobile Homes and RVs rank #7 out of 250 industries to pay close attention to. Cavco is listed as the top stock in this industry.

This article from zacks.com highlights that Cavco’s recent earnings crushed expectations. EPS was expected to be $4.91 and the company reported $5.80. What’s even more impressive is the stock was $2.71 this same quarter a year ago.

This article from seekingalpha.com states that Cavco is the third-largest producer of factory build housing in the US, with 12% market share. With the rising costs of homes, its become harder for younger adults to buy a home for themselves. Cavco offers an affordable solution that may be produced en masse. 

This article from home.com talks about the growing trends of manufactured and mobile homes. Both types of homes are significantly more affordable than the traditional homes that are built on-site. The article goes into detail about costs, sizes, taxes, finding land, obtaining a mortgage, and more.

This article from homeadvisor.com breaks down the costs of building a module home. Costs are referenced above.

This article from bedrock-communities.com is titled “Are manufactured homes the future of housing?” Owning a manufactured or module home includes less maintenance, more energy efficiency, lower prices, and improved technology.

This page from statista.com outlines the average prices of homes since 1965.

  • 1965 = $21K ($194K in 2022 dollars)
  • 1970 = $26K 
  • 1975 = $42K 
  • 1980 = $76K 
  • 1985 = $100K
  • 1990 = $150K
  • 1995 = $158K
  • 2000 = $207K
  • 2005 = $297K 
  • 2010 = $272K
  • 2015 = $360K
  • 2020 = $390K
  • 2022 = $453K

Cavco Competition

Cavco (CVCO)

  • Summary: On Sale
  • Score: 89/100
  • MOS: 90%
  • Share Price: $210
  • Sticker Price: $1,057
  • Revenue: $1.6B

LCI Industries (LCII)

  • Summary: On Sale
  • Score: 78/100
  • MOS: 90%
  • Share Price: $119
  • Sticker Price: $603
  • Revenue: $4.4B

Skyline Campion Corporation (SKY)

  • Summary: Watch
  • Score: 78/100
  • MOS: 49%
  • Share Price: $52
  • Sticker Price: $89
  • Revenue: $2.2B

Cavco 4Ms

MOS: With a score of 18/20 and MOS of 80%, the financials are nearly perfect. This is a well-operated company.

Meaning: Knowing that home prices have skyrocketed in the last few years, there needs to be a solution to help people buy a home. With the average home price over $450k, that’s too high for the average first-time home buyer. For context, that’s over double the price of the average home in 1965 (after accounting for inflation). I believe interest rates may “cool off” home prices but we need another solution. That’s where Cavco comes in. With two-story modules homes ranging between $75K and $188K, this makes buying a home significantly easier and inline with home price equivalents to the 1960s.

Moat: I’m not concerned about the competitors in this case. We have a unique opportunity to build more homes at scale and companies like Cavco, LCI Industries, and Skyline Champion Corporation can all thrive. The companies that may take a hit may be the custom home builders that construct homes priced between $400K and $2M.

Management: Bill Boor has both a diverse and fun background. He’s served as President and CEO since 2019. Prior to Cavaco, he served as CEO of Great Lakes Brewing from 2015 through 2019. (For beer consumers, I highly recommend their Edmund Fitgerald Porter and Hazecraft IPA).  Prior to Great Lakes Brewing, he served in various leadership roles at Cliffs Natural Resources for 7 years. Prior to Cliffs Natural Resources, he served at Eagle Materials for 5 years. Prior to Eagle Materials, he worked at Centex, Weyerhaeuser, and Procter & Gamble. Some of the roles he served included finance, strategic development, manufacturing management, and more. At one point he even started his own private equity firm focused on the mining industry. Overall, Boor has a very wide range of experience in a variety of industries. I love to see CEOs with this type of background. Based on past business experience, they can quickly pull together information on what works and what doesn’t work. He’s a great fit for Cavco and I hope he continues with this company over the next 5 years.

Cavco Financials

Now let’s take a look at the financials. A wise investor should be able to read the income statement, cash flow statement, and balance sheet and within 60 seconds have a pretty good idea of how the business is performing.

Revenue (Found on the Income Statement)

  • 2018: $962M
  • 2019: $1B
  • 2020: $1.1B
  • 2021: $1.6M
  • Revenues have consistently increased which is a great sign.

Net Income (Found on the Income Statement)

  • 2018: $68M
  • 2019: $75M
  • 2020: $76M
  • 2021: $197M
  • The net income has significantly increased in 2021 showing the demand of module and mobile homes.

EPS (Found on the Income Statement)

  • 2018: 7.56
  • 2019: 8.22
  • 2020: 8.34
  • 2021: 21.54
  • The EPS growth has also significantly increased in 2021.

Free Cash Flow (Found on the Cash Flow Statement)

  • 2018: $25M
  • 2019: $87M
  • 2020: $88M
  • 2021: $125M
  • Free Cash Flow has consistently increased which is a great sign.

Total Assets (Found on the Balance Sheet)

  • 2018: $725M
  • 2019: $810M
  • 2020: $951M
  • 2021: $1.1B
  • Total Assets have consistently increased which is a great sign.

Total Liabilities (Found on the Balance Sheet)

  • 2018: $195M
  • 2019: $202M
  • 2020: $268M
  • 2021: $324M
  • Total Liabilities have increased which is okay.

Total Debt (Found on the Balance Sheet)

  • 2018: $35M
  • 2019: $19M
  • 2020: $25M
  • 2021: $13M
  • Total debt has decreased by almost 50% in 2021 which is a great sign.

Total Equity (Found on the Balance Sheet)

  • 2018: $529M
  • 2019: $607M
  • 2020: $683M
  • 2021: $830M
  • Total Equity has consistently increased which is a great sign.

Is Cavco stock a good buy?

All 4M’s look great but the M that stands out the most to me is the Meaning. With the average home price in the US over $450K, this makes buying a home difficult for most American’s. It’s also important to point out that home construction slowed down during and after the 2008 recession but people did not stop reproducing. If home production did not keep up with people production, where are people going to live? The two options include either renting or owning a home. To keep up with demand, we need to count on companies like Cavco who can produce module homes that combine high quality, fast delivery, and lower costs all into one product. Module home construction looks like the future of the housing industry.

If you’re looking for a stock to add to your portfolio, Cavco may be a great fit.

The Summary, Score, and MOS of this stock may have changed since the posting of this review. Please login to Tykr to see up-to-date information.

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