Saturday, December 24, 2005

Nobility Homes--Less-than Noble Growth?

Nobility Homes, Inc. (NOBH - $26.80), is a Florida-based company that makes pre-manufactured dwellings that can sell for anywhere from $20,000 to $80,000. The Company sells a broad line of manufactured homes through its wholly-owned Prestige Home Centers. In addition, Nobility also sells its houses on a wholesale basis to independent manufactured home retail dealers and manufactured home communities.

Despite rising interest rates and construction material cost increases, Nobility recently reported record sales and earnings results for its fiscal year ended November 5, 2005. Sales for fiscal year 2005 increased 13% to $56,710,925 and operating income increased 35% year-over-year to $8,342,410. Diluted earnings per share for fiscal year 2005 increased 32% to $1.49 per share, compared to $1.13 per share last year.
Citing an improved economy, lower unemployment claims, and the specific demand from building replacement homes due to the hurricanes, management expects the demand for its homes to grow in fiscal year 2006. Nonetheless, the 10Q Detective has uncovered some problematic concerns in SEC filings that may compromise forward-looking growth:
  • Affiliated Entities. Terry Trexler, President and Chairman of the Board of Directors, and Thomas Trexler, the Executive Vice President and CFO, each own 50% of the stock of TLT, Inc. TLT, Inc. is the general partner of limited partnerships which are developing manufactured housing communities in Central Florida (the "TLT Communities"). The President owns between a 24.75% and a 49.5% direct and indirect interests in each of these limited partnerships. The Executive Vice President owns between a 49.5% and a 57.75% direct and indirect interests in each of these limited partnerships. The TLT Communities have purchased manufactured homes exclusively from the Company since 1990. 10Q Detective is not alleging any misdoing; nonetheless, 'stuffing the distribution channel' is always a concern. [ed. note. Nobility, with a market capitalization of only $108.7 million, is a small enough company that such close-ties fly under the radar.]

  • Concentration of Revenue Risk. The Company's customers are concentrated in the State of Florida. One customer, a multi-park owner, accounted for over 13%, of the Company's sales during the past fiscal year. In addition, he Company had an exposed credit risk of approximate $1,771,000 receivable balance with this customer.

  • Excess retail inventory. Consisting primarily of finished homes, pre-owned manufactured homes and model home furniture, inventory has risen to $9.5 million from $6.9 million in the prior fiscal year. Of concern, how can demand be accelerating when inventory turnover has risen to 89 days, from 66 days in the prior 12-month period?

Performance metrics are bullish: Direct competitor comparisons, including the likes of Fleetwood Homes (FLE), Skyline Corp. (SKY), and Champion Enterprises (CHB), reflect bullish performance metrics: consistent operating margins of 14% vs. an industry average of 5.7%; Return-on-Equity of 17.8% vs. Industry 4.4% average, and a forward P/E ratio selling at a 35% discount to an Industry P/E of 25.

Granted, damage from hurricanes in the state of Florida should provide visible earnings growth for Nobility in the near-term. Longer-term growth, however, in the manufactured housing environment--with rising interest rates and raw material costs--looks less-than noble. The 10Q Detective is neutral on this stock.


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