Living in a Van Down By the River

Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Saturday Night Live’s hilarious bit about a motivational speaker’s “high-class” living accommodations brought some laughs, although it was no place that we would want to call home.  Fortunately, the rebounding U.S. economy and slow rise in new hiring is allowing more people to avoid that fate and join the ranks of homeowners.  In December, the U.S. Census Bureau reported that sales of new single-family homes reached a seasonally adjusted level of 377,000, a 15.3% gain over the prior year.  The primary beneficiaries of the increased housing activity have been the domestic home builders, most of which narrowly escaped bankruptcy during the financial crisis and are now returning to profitability.

Thank You Uncle Sam

The industry’s gains have been fairly broad-based, with higher sales across all geographies and price points.  Builders that survived the downturn with diverse land holdings have performed the best during the recovery, including industry leader Pulte Homes (NYSE: PHM).  With 707 active communities across the U.S., Pulte is one of the largest domestic home builders and has benefited from a resurgent auto sector, especially in its home state of Michigan.

In FY2012, the company has reported a 13.2% increase in revenues, with gains in average unit prices and units sold of 6.7% and 3.4%, respectively.  Pulte has generated sales increases across all of its operating areas, led by a 24% increase for its North region.  Margins have risen due to the improved pricing environment, as well as cost savings from its various restructuring activities.  The future is also looking bright, with a 24% increase in orders compared to the prior year.

The luxury segment is rebounding too, as evidenced by results from niche player Toll Brothers (NYSE: TOL).  Despite slow economic growth for the U.S., the company is finding more and more willing buyers for its premium-priced homes, with current average prices of over $530,000 for its detached, single-family homes.  In FY2012, Toll has reported a 27.6% increase in revenues, with each of its regions enjoying higher sales levels.  While the company’s average home prices were in line with the prior year level, Toll sold 26% more units and its sales force was effective at generating significant add-ons to the base packages.  The company is also confident in its future, with a 49% in orders versus the prior year.

Finding a Better Angle

While the home builders’ business trends are up, so are the stock prices of Pulte and Toll, with one year gains of roughly 170% and 60%, respectively.  Some of their smaller, highly-leveraged competitors have enjoyed even larger gains.  Since a large part of the business improvement has already been priced into shares of the traditional builders, investors should instead look at the companies who focus on alternative housing options, such as the manufactured housing segment.  After bankruptcies in this often-maligned area over the years, the business is now dominated by a small group of companies that includes Berkshire Hathaway (NYSE: BRK-B) and Sun Communities (NYSE: SUI).

Berkshire’s Clayton Homes subsidiary is the largest manufactured home producer in the country and it benefits immeasurably from the parent company’s strong credit rating.  In FY2012, the Clayton unit has reported revenues and segment profit of $2.2 billion and $159.0 million, increases of 2.7% and 40.7%, respectively, versus the prior year period.  While the company sold more units during the period, the industry suffers from an unfair advantage that the federal government provides to the traditional housing market through its mortgage purchase programs.  Nevertheless, Clayton’s manufactured home sales and profit levels should continue rising as overall economic growth leads to better industry fundamentals.

Obviously, Clayton’s business is a very small percentage of Berkshire’s overall revenues, though, so investors should focus on Sun Communities.  Founded in 1975, the company manages 173 manufactured housing and recreational vehicle (RV) communities in 19 states.  While Sun generates three fourths of its revenues from the leasing of space in its communities, it has been growing its sales and rentals of manufactured homes.  In its latest fiscal year, the company reported increases in revenues and adjusted operating income of 8.7% and 18.3%, respectively, compared to the prior year.  The company benefited from rising occupancy at its network of properties and a 5% increase in manufactured home sales.

In FY2012, Sun has switched into growth mode, with over $180 million of acquisitions that have focused on its core markets of Florida, Texas, and Michigan.  As one of the few industry players with publicly traded shares, Sun has a strong ability to continue its consolidation of the segment.  In the first nine months of the year, the company has reported increases in revenues and adjusted operating income of 16.9% and 27.9%, respectively, compared to the prior year period.  Sun benefited from continued improvement in occupancy levels and a good pricing environment for its rental homes.  With a great 6% dividend and strong insider ownership, this REIT is one to own.


rghanley owns shares of Berkshire Hathaway and Sun Communities. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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