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But there are some signs of hope on this front. Last week, Origen Financial (ORGN, news, msgs) sold to other investors a package of mortgages on factory-built homes, a vote of confidence in the sector by the debt markets.
So when will the sector turn around? Champion Enterprises (CHB, news, msgs) Chief Financial Officer Phyllis Knight expects a "modest recovery" next year, when sales of manufactured homes may see increases in the low single digits. Palm Harbor Homes (PHHM, news, msgs) CEO Larry Keener doesn't expect "meaningful change" until the end of 2008. "There is just too much inventory out there and too much uncertainty on the finance side," he says. Rodriguez -- who says there is still a lot more fallout ahead from the loose lending standards of the past few years -- has an even longer time horizon for a rebound.
If you are trying to time an entry, just remember that stocks often begin to advance well before clear signs of a recovery in their end markets.
Plus, most of the surviving companies have enough financial strength that they will last long enough to benefit from a sector rebound, says Robotti. So investors don't face much risk that the following factory-built home players will disappear into bankruptcy. Robotti's shop has a position in all of these, and his firm is a market maker for shares of Cavco Industries, meaning that it stands ready to buy or sell shares from the public to maintain the market in the stock. Rodriguez owns Champion Enterprises and Fleetwood Enterprises.
Champion Enterprises last week surprised investors with a 43% spike in reported income, mainly because of strength in international markets such as the United Kingdom. The company has done a good job of shrinking capacity and maintaining financial strength, says Rodriguez.
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Fleetwood Enterprises, in contrast, was late to restructure in the downturn that has plagued the group for the past seven years, but it is now making progress under new management. It has significant debt but enough financial strength to carry it through until the sector recovers, Rodriguez thinks. Valued separately, its recreational-vehicle and manufactured-housing divisions could be worth $13 a share, estimates Citigroup (C, news, msgs) analyst Gregory Badishkanian. But it's not clear the company will be split up.
Palm Harbor Homes looks the most like Buffett's Clayton Homes, because it produces, sells and provides financing for homes. "Because we integrate manufacturing, retail, insurance and finance, we generate more revenue per sale," says CEO Keener. The result is higher profit margins than those of competitors. That's one reason FTN Midwest Securities analyst James McCanless has a buy on the stock. (He does not own it and his firm does not anticipate doing investment banking for the company.)
Cavco Industries has remained profitable throughout the industry downturn. Its stock sells for about $34 a share, and the company has a cash hoard of $10 a share, which it plans to invest in acquisitions or in new plants.
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Jubak's Journal: Fallout of foreclosuresWhat happens when someone goes into default and then forecloses on a home mortgage? MSN Money's Jim Jubak details three scenarios and provides tips for investors looking at debt instruments.
Origen Financial provides lending for the purchase of factory-built homes. Its stock trades for less than the company's book value, a measure of how much assets exceed liabilities and intangible assets -- one reason Robotti likes the stock. He also thinks Origen has high-quality mortgages in its loan portfolios.
At the time of publication, Michael Brush did not own or control shares of companies mentioned in this column.
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