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Legacy Housing Corporation (NASDAQ:LEGH ) provides home manufacturing, retailing, and financing solutions. LEGH has lagged S&P 500 and its peers in the manufactured housing sector such as Skyline Champion (SKY) and Cavco Industries (CVCO) in the last 3 years. I think it is still a buy, given the solid fundamentals and macro tailwinds.
LEGH's products are sold in three ways:
1: Direct sales: sold to independent retailers and paid for prior to shipment.
2: Commercial sales: for home parks under commercial loan, which is also paid for upfront.
3: Consignment sales: sold to independent retailers, but a portion of product costs financed by the company.
4: Retail sales: sold from company-owned retailer centers, products financed by the company.
Both direct and commercial sales have guaranteed payments that are paid for upfront. So, LEGH will have some money in hand before they start manufacturing homes. This reduces lots of operational risks and provides the company sufficient liquidity to manage its supply chains.
From the table above, direct sales (from independent stores) dropped significantly, while the retail store sales (from LEGH stores) grew from $13M to $17M. LEGH clearly wants to move sales to its own retail channels. There are currently 13 company-owned retail locations, and 1 or 2 new retail centers are expected to open this year. This is very important for LEGH as the recent annual report says:
In order to maintain our growth, we will need to be able to continue to properly estimate anticipated future volumes when making commitments regarding the level of business that we will seek and accept, the mix of products that we intend to manufacture, the timing of production schedules and the levels and utilization of inventory, equipment and personnel.
So, correct estimates of market demands are a key factor for sustainable growth. More sales from their own retail centers provide first-hand and timely data of the local market demands. This should enable them to make more informed decisions on future home manufacturing and design.
Moreover, sales through company-owned retail stores are also more profitable than others, according to the latest filings.
LEGH has been planning to develop manufactured housing communities for a while. As the table below, there are already 1,089 acres of land acquired, all from growing markets in TX. CEO Curtis is very excited about this opportunity, as he revealed in the 2021 Q2 news release:
This quarter, we will be breaking ground on our large development southeast of Austin and, as well, we are making steady progress on several other significant development projects. All is good.
Historically, mobile home community businesses enjoy higher margins than LEGH (as the chart below). Becoming a mobile home park operator could bring another highly profitable revenue stream for LEGH. The company will have better pricing powers and more options to place their homes.
UMH Properties (UMH) provide mobile home parks with similar house types to LEGH's. Their properties stay at an 85% occupancy level with an average monthly rent of $461. Typically, a home community builds 4.7 sites per acre. So, LEGH's 1089 acre lands should have the potential to generate $24M annual revenues (461*12*4.7*1089*0.85). Although not all lands will be developed and the rents vary depending on house types, we see a tremendous runway for growth in this space. Moreover, LEGH has long-standing relationships working with community operators in TX. This should not be an unachievable task for them.
Based on the Texas Manufactured Homes Association, the interests in mobile homes are the highest in the last ten years (below).
July shipments have also grown significantly in June (Below).
Inflation and housing shortages should keep LEGH's demand high. Texas's demographics are younger and have more immigrants, which is also beneficial to LEGH. Housing is a big cycle. I don't see this trend will change in the foreseeable future.
As a tiny stock with only a $435M market cap and 44k average daily trading volume, any movement from market sentiments can bring huge shifts to LEGH share prices. This is not a name that speculative money and the general public will chase, and it won't double its revenues like many tech companies. However, the COVID-19 pandemic and the recent shortage have not impacted the business in a large way. It is likely that we still need mobile homes, and LEGH will continue to expand its manufacturing capabilities and grow.
LEGH manufactures homes that probably won't change many 10 years from now. So, its $280M book value should be a strong base of its value. The current PB ratio is 54% lower than Cavco Industries and 73% lower than Skyline Champion Corp. It is clearly undervalued.
$40M net income with a 16% return of capital also provides strong support to LEGH's growth when the company keeps reinvesting its profits. The historical annual retained earnings growth is about $30M, so a $4.8M (30*16%) annual profit growth could be expected (this year is on track to achieving it). 10 years from now, if the earnings grow to $98M based on the current speed, PE will be less than 5x. Bigger companies like SKY always trade higher than 25X. If LEGH can keep the current operational performance, I think 20X multiple is definitely achievable. And that makes it a quadruple opportunity.
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Disclosure: I/we have a beneficial long position in the shares of LEGH either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Disclaimer: I am not an investment advisor, and this article is not meant to be a recommendation of the purchase or sale of stock. Investors are advised to review all company documents and press releases to see if the company fits their own investment qualifications.