Saturday, January 31, 2015

Nobility Homes ( Nasdaq - NOBH ) -- Sun Dance

Nobility Homes (NOBH $9.50) is a regional producer of manufactured homes, specializing in the northern Florida market.  The company has been run carefully throughout its 45 year history, allowing it to participate in the industry's boom times while surviving the downturns.  Finances remain solid despite the most recent malaise.  Before the 2007 housing collapse Nobility established a broad-based retail network that leveraged sales volume and profit margins.  At the peak almost 90% of sales were made through the company's own retail network.  Following the crash Nobility scaled back that operation to conserve capital and reduce everyday costs.  Nobility currently has 10 retail centers compared to 21 in its heyday.  Only 40% of sales are going through the retail channel today.  The rest are sold to mobile home parks on a wholesale basis.

Total sales are approximately 50% of what they were before the housing market collapse.  Nobility expected the industry to rebound more quickly than it has.  Florida traditionally has been a volatile market, but one that has followed an upward progression over the long haul.  Activity has remained depressed longer than normal during this cycle.  Explanations vary.  A weak job market combined with strict mortgage requirements were primary factors.  Nobility has a relationship with a subsidiary of Berkshire Hathaway to provide mobile home financing.  So the company was able to help some marginal customers purchase homes.  But Dodd-Frank regulations have kept most banks out of the business, making it difficult for low income earners to buy what otherwise would be an economical place to live.

The market has turned positive during the past year.  Further improvement is likely in 2015.  And a lengthy period of progress is possible through the end of the decade.  The cancellation of extended unemployment benefits drove a large increase in new workers during 2014.  The U.S. unemployment rate declined to 5.5%, as a result.  Most of the new jobs were of the lower income variety.  Still, $30,000 a year is more than nothing.  If your wife makes that, too, now you're in the 600-700 credit score range.  That's a key demographic for mobile homes.  Retirement demand is on the rise, too.  Many 60-75 year olds held off on moving to Florida due to the uncertainty that prevailed during the last several years.  That continues to be a factor.  But the stock market is up.  And time is marching on.  More are making the move.

Manufactured housing continues to be a cost effective option.  Triple wides with 2,000 square feet or more still cost less than $100,000.  Resale values have improved over the years due to regular improvements in quality.  Younger buyers often purchase land and install the homes there.  Older customers gravitate to parks, which are like fraternity houses for retired people.

A large number of competitors have gone out of business.  The rest are mainly private companies.  Most of them are run by managers that, like Nobility, have been involved in the industry for decades.  Nobility's chief executive is more than 70 years old, although he used to be a pole vaulter and a marathoner and remains in remarkably good condition.

The industry is bouncing back.  Nobility's finances are in excellent shape and improving.  The company is in breakfast counter talks with several private companies about consolidating into a much larger operation, using Nobility's publicly traded stock as the investment vehicle.  The most likely outcome is that Nobility will remain independent, drive performance, and sell to Cavco or some other nationwide operator.  If the housing market keeps improving, which seems likely in the lower end of the market where Nobility operates, a decent premium from the current valuation could emerge.  If Nobility actually can persuade its local competitors to join forces and create a regional powerhouse, substantially higher gains are possible.

We don't have a target price.  The stock is trading at book value.  The industry is turning around.  Big operating income gains are possible if the industry just returns to normal.  A corporate maneuver could amplify appreciation.  Plus, if Jeb Bush or Marco Rubio is elected president, the great state of Florida is bound to benefit.

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