## Cavco Industries: A Small Homebuilder Ready to Tackle the Affordable Housing Crisis
As 30-year fixed-rate mortgages climb higher, the homebuilding industry is experiencing a renewed sense of optimism. Buyers are incentivized to make offers, and homebuilders are better positioned to secure loans for development projects. While large companies like D.R. Horton and Lennar dominate the market, smaller players like Cavco Industries (CVCO) are also poised for success.
Cavco specializes in the manufacturing of prefabricated homes and other buildings, including RVs. The company also offers financing through its financial services division. This focus on affordability positions Cavco to capitalize on the pressing need for affordable housing across the U.S., where an estimated 7.3 million rental homes are lacking for renters with extremely low incomes.
The company’s recent performance reflects this growing demand. In the first quarter of fiscal year 2025, Cavco reported a 20% sequential improvement in home sales volume and a capacity utilization rate of 65%, up from 60% in the previous quarter. Order increases of 25% have contributed to a backlog of $232 million, a significant increase from $191 million just three months prior.
Further bolstering Cavco’s prospects is a recent announcement from the U.S. Department of Housing and Urban Development (HUD) that allows the immediate construction of duplex, triplex, and quadplex manufactured homes nationwide. Cavco is well-positioned to capitalize on this shift with new development projects.
A Look at Cavco’s Fundamentals
While Cavco’s sales are booming, some investors may be hesitant due to its relatively high forward P/E ratio of 25.1 compared to other homebuilders. The company also experienced a decrease in its consolidated gross margin to 21.7% in the first quarter, driven by lower average selling prices and weather events impacting its financial services segment. Expenses increased by more than 5% to $64.9 million due to acquisition costs and other factors. However, it’s important to note that net revenue improved by 0.5% to $477.6 million, a positive reversal after the previous quarter’s decline. Additionally, Cavco’s cash balance stands at over $359 million, a $6.6 million improvement compared to the previous year, demonstrating the company’s financial strength as it prepares for a surge in affordable housing demand.
Comparing Cavco to Other Homebuilders
When compared to giants like D.R. Horton and Lennar, Cavco may appear overvalued. These companies have lower forward P/E ratios of 13.3 and 12.7, respectively. However, it’s worth noting that both D.R. Horton and Lennar have experienced significant share price growth in the last year, with returns of 83.4% and 73.7%, respectively. Analysts have set price targets below current levels for both companies, potentially reflecting the already high valuations.
Cavco’s specialization in low-cost, factory-built homes positions it uniquely to benefit from the continued push for affordable housing options across the country. While some fundamental metrics may raise concerns, the company’s strategic position within the industry and strong demand for its products make Cavco a compelling investment opportunity.
