Palm Harbor Homes (Nasdaq:PHHM) resides in what amounts to a subsector of the house building industry - manufactured housing. Palm Harbor manufactures, sells and finances pre-built homes. Just as the overall housing industry has been hard hit by the severe credit crisis and the subsequent economic downturn, so, too, has the manufactured housing industry. So what are the prospects for the manufactured housing industry and Palm Harbor? (Acquire more detailed information about the problems in the housing industry at Why Housing Market Bubbles Pop.)
Manufactured Homes: The Alternative Mainstream
Manufactured housing, or mobile homes, are factory-built homes that are transported to specific locales, usually to either permanent or semi-permanent sites on owned or rented land. With construction completed in factories and minimal assembly requirements at the destination sites, these homes provide a considerable cost savings as compared to traditional site-built homes. Double-wide "luxury" manufactured homes at 1,500-2,500 square feet retail for $50,000 to $75,000, which is less than half of the cost of homes constructed on-site. With these unique advantages, and the ongoing push by the industry over the last twenty-five years to improve quality, manufactured housing would seem to appeal to consumers in ways that traditional housing does not. Unfortunately, any advantages of the manufactured housing sector have not been capitalized on.
Palm Harbor Homes, a leader in its industry, has a market cap of only $123 million, which demonstrates the small scale of the manufactured housing industry against the greater housing sector. With annual revenue at $555 million for fiscal 2008, expected revenue at $452 million for fiscal 2009 (ending March 31) and an additional projection of revenue at $450 million for 2010, the challenges are clear. Lack of size can be good when it creates flexibility in resolving obstacles, but it can be a detriment when resources are not available to endure the punishing economic conditions throughout the housing industry.
Thus, upcoming quarterly revenue projections call for a loss of 37 cents per share versus a loss of 41 cents one year ago. For the full year, ending March 31, a loss of 97 cents per share is expected as compared to a loss of 89 cents last year, while projections for fiscal 2010 call for a 44 cents per share loss. The stock has dropped from a high of $13.15 to a low of $3.70 per share during the last year. And recently it traded at $5.40.
As poor as these projections may appear, they are part of the larger story of the overall housing market, which has been battered. An arguably stronger manufactured housing competitor, Clayton Homes, was taken private by Warren Buffett's Berkshire Hathaway (NYSE:BRK.A) for $1.7 billion in 2003. Clayton's privatization, pre-housing crisis, strengthened its position in the industry and steadied it against the troubles of today. Contrast this with news that a credit line provider for Palm Harbor, Textron Financial, has experienced difficulty, which never makes things easier in such a capital-intensive industry as home construction. Another solid company, Champion Enterprises (NYSE:CHB), has had a rough ride with similar negative earnings as Palm Harbor, while one of the best known names in the industry, Fleetwood Enterprises (maker of RVs as well as mobile homes), has seen its stock price fall below $1 and now trades on the pink sheets.
House Half-Full or Half-Empty?
As recently as 2000, manufactured housing accounted for over 20% of all new housing starts. And, in 1995, manufactured housing claimed 33% of new home constructions. However, manufactured housing accounts for barely 10% of the housing market today. But why? It has been argued that the manufactured housing industry worked through its own subprime crisis first, which would leave it poised to capitalize on a housing upturn ahead of the traditional housing industry. With new lending practices in place in the "TARP Era", manufactured housing buyers are expected to benefit. However, little evidence points toward these optimistic views becoming reality. Industry-wide earnings projections remain dismal for manufactured housing, arguably worse than those of the traditional housing construction industry. (TARP is the government's attempt to forestall a deep, extended recession. But will it work? To learn more, read Liquidity and Toxicity: Will TARP Fix the Financial System?)
The manufactured housing industry simply has not been strong enough to weather the current downturn. Further, a major re-invigoration is required for this sector to have a strong future. If the recession continues to drag on, the multiple interrelated forces that have damaged the housing industry in the last couple of years could all out crush the weaker manufactured housing companies. Overall buyer resistance has squashed any expected boom in manufactured housing and other financial difficulties have only intensified as the economy has worsened. None of this is good news for Palm Harbor and the rest of the manufactured housing industry.