Robot1 wrote up Legacy Housing about three years ago.  That writeup is worth reading for background. Recent events warrant an update. 

LEGH is the fourth largest producer of manufactured homes in the United States.  The company has three production facilities, two in Texas and one in Georgia.   

LEGH sells its homes through independent dealers (49%), company owned locations (11%), and direct to mobile home communities (45%).  The company facilitates sales by providing financing to both individuals and park owners.   

Fundamentals for manufactured home producers are attractive.  The demand side is driven by the perennial need for affordable housing. The supply side is healthy as well, helped by an oligopolistic industry structure.  The top three producers account for ~75-80% of the industry.   

The setup: 

This tight supply/dynamic has been good for industry pricing in recent years.  Gross profit per unit has consistently increased for LEGH since 2016 despite all the volatility in input costs.  And their loan book has performed spectacularly.   Fundamentals were particularly strong in 3Q 2021, which sent the stock soaring into the mid $20s.  On Jan 5, the board updated the compensation plan for LEGH’s longtime CEO/co-founder which granted him 175,000 shares if the company hits $36 and another 175,000 shares if it hits $48.  Ambitious! 

However, in early March, the company disclosed the resignation of its CFO.  Shortly after, the company disclosed that it would be late filing its 10k.  As of today, the company has still not filed its 10k or its subsequent 10Q.  The stock is now 38.4% below where it was the day before this news.  Meanwhile, Skyline and Cavco have continued to report strong results.   

So what happened?  Per a press release in mid-2021, the company switched its audit firm from BKD to Weaver and Tidwell.  From browsing their websites, both companies seem like legitimate regional audit firms.  I was previously told that the reason for the switch was because LEGH thought BKD was overpriced and had poor service.   

Apparently, the new auditor, Weaver, uncovered issues related to inventory accounting.  This isn’t overly surprising since the company has been a bit of a mess in the back office and has had a lingering material weakness for the last couple years (although no adverse opinion on the financial statements).  LEGH’s CFO subsequently resigned.   My understanding is that the issues are not material from an earnings perspective but do need to be resolved before the auditors will sign off. 

On May 9th the company hired a new CFO named Ronald Arrington.  He has 30+ years of experience specializing in turning around dysfunctional accounting and finance functions (see his linkedin page). 

While there is no doubt that there are numerous red flags here, I am betting that 1) the company will get current within the next couple months 2) the company will show strong earnings when they report Q4’21 and Q1’22 (and possibly even Q2’22).   If I’m right, the current price is a bargain.

Valuation: 

There are three primary sources of value, the loan book, some land holdings, and the manufacturing operation.   

The loan portfolio has a book value of $256mm and TTM interest income of $27.1mm.  This is a 10.6% ROA.  At present, the ROA = the ROE since the company does not use any leverage (though it should).  Defaults have historically been very low due to disciplined underwriting and the nature of the collateral. For the purposes of this writeup, I will conservatively value the loan portfolio at 1x book value.   

The land portfolio (which is being developed into mobile home parks) has a current book value of $13.1b.  However, land around Austin, San Antonio, and Dallas has appreciated tremendously in the past few years and several of the parcels have been substantially improved.  I conservatively value the loan portfolio at 1.5x book value.   

Additionally, we need to take into consideration the earnings since they last reported (9/30/21).  Using consensus estimates this adds another $34.7mm of value (through 2Q).   

This implies a manufacturing EV of $78.1mm vs. manufacturing EBIT of $29mm.  A multiple of 10x EBIT for the manufacturing operation would imply a ~$25 stock price.