We like old-fashioned businesses. This one is in low-cost, manufactured housing. If you know what a "double-wide" is then you know what types of homes we are talking about here.
Any investor should respect the numbers Legacy ($LEGH) is generating - $169M LTM revenues up 31%, 24% EBITDA margins and pre-tax ROE of 26%. These levels of growth and profitability have been consistent over the last 10 years.
Considering Low Cost Housing
Housing is expensive, especially stick-built single family homes. For many Americans, a manufactured home is an excellent, low-cost solution. Demand for lower-cost housing has been very durable and it's not just from low earners. As rents increase in greater metropolitan areas young adults are realizing that they may be better off owning, if they can find a "starter" property that they can afford. Often that won't be a detached stick-built structure.
Other demand drivers are from community builders (described below) and as vacation homes requiring less investment and maintenance that a typical one family home.
Unit volume has been recovering since the US economic collapse in 2008 but still has room to expand further before nearing prior levels.
Older adults are also opting for these lower cost options. Especially when they are set in warm and desirable locations. One REIT company, Sun Communities (NYSE: $SUI) has done an excellent job building communities based on this style of housing. Other examples of these specialty REITs are Equity Lifestyle ($ELS) and UMH Properties ($UMH). Here's a good overview of this modular home REIT sector for more background.
It's debatable how the manufactured home sector will perform as interest rates and the economy change. Some believe that the sector is countercyclical but valuations are fairly high and while business may hold up during more challenging times, valuations may still decline.
The manufactured home industry is well established with some leading, publicly-traded companies including Champion/Skyline ($SKY) and Cavco ($CVCO). The very fragmented regional industry has been consolidating. Cavco has made a large number of acquisitions in the last 10 years and Compass/Skyline is the result of a recent merger. The giant of the industry is Clayton Homes which was bought by Berkshire Hathaway ($BRK) in 2003 at what turned out to be a bargain price of $1.3B.
Legacy is a very small player relative to what is now the "big three" which have a whopping 78% of the market.
Legacy doesn't really have any a discernible "moat" against the competition. They make a solid product that competes well against other small regional players but is outclassed by many offerings from Clayton, Skyline, and Cavco.
But Legacy is small and has exercised excellent control of their own destiny. From a smaller base, Legacy has an easier time growing and they have been very effective at generating returns on capital.
We would echo management's view that their historical performance represents a "one slide roadshow" for investors focused on performance. The historical numbers are impressive.
Both $SKY and $CVCO are both in the same business so we've got to compare $LEGH with those two. Their results have not had the consistency or high margins that Legacy has generated so based on a multiple of earnings $LEGH is coming at 8-11x which feels low given their growth. Even with a market downturn, they can manage to maintain profits so we'd be more inclined to give them at least a 12-15x multiple which would value the shares at $300M to $375M which comes to $12.5 to $15/share.