Manufactured homebuilder PalmHarbor (Nasdaq: PHHM ) reports Q2 2007 earnings results Tuesday afternoon. Want to know what Wall Street expects to see? Read on. Want to know what really matters? Read on a bit more.
What analysts say:
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Buy, sell, or waffle? One additional analyst has initiated coverage on Palm Harbor since last we checked in, but I'm not really sure why he bothered -- he's only saying to hold. That brings the tally up to one buy and two hold ratings.
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Revenues. On average, the three analysts think Palm Harbor grew its sales 10% last quarter, to $188.4 million.
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Earnings. Profits, however, are believed to have fallen 25% to just $0.03 per share.
What management says:
Second verse, same as the first. Three months ago, previewing the firm's Q1 earnings announcement, we noted how Palm Harbor had cited increased market share and a shift in product mix toward higher-margin modular homes as contributing to its recent success. Once the earnings news came out, it was revealed that Palm Harbor achieved these same goals again in the beginning of its fiscal year 2007. CEO Larry Keener once again pointed to "increased market share, a continued shift in product mix to modular homes and higher average sales prices" as underlying the firm's improved revenue and earnings numbers.
While we hope to hear similar words next week, we're not optimistic -- and Keener didn't give us reason to be. In his guidance on the quarter that we'll be hearing about on Tuesday, he noted, "Growth in our own business has slowed since the end of calendar 2005. Backlogs are smaller and our incoming order rates indicate relatively flat growth for the near future."
What management does:
So far so good, but a quick review of the firm's income statement suggests that Palm Harbor may not be benefiting as much as investors might hope from its expanded market share and better product mix. It's true that over the past six months, sales are up an impressive 19%. But at the same time, average cost of sales has grown 20%, and operating costs are up 19%. Here's what that means for margins:
|
Margins %
|
3/05
|
6/05
|
9/05
|
12/05
|
3/06
|
6/06
|
|
Gross
|
25.8%
|
25.7%
|
25.6%
|
26.6%
|
26.1%
|
26.3%
|
|
Op.
|
0.6%
|
0.8%
|
1.6%
|
4.1%
|
3.5%
|
3.7%
|
|
Net
|
(0.6%)
|
(0.4%)
|
0.2%
|
1.5%
|
1.6%
|
1.6%
|
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.
One Fool says:
Until Palm Harbor finds a way to wring some more efficiencies of scale out of its rising sales, margins would appear fated to remain stuck in the ultra-low-single digits. That doesn't mean that profits won't grow, mind you. If you sell more stuff at the same profit margin, profits will of course increase; it's just that they won't outpace sales growth until margins start expanding.
Unfortunately, Keener's cautious outlook for the near future suggests to me that we won't see margins expanding right away. Longer term, though, things look more optimistic. Keener continues to believe that Gulf Coast reconstruction plans will favor the modular home industry. His firm is taking steps to capitalize on that trend, in particular, by designing a new "shotgun-style cottage" that should fit right in among the region's native stick-built architecture. If the new cottage design turns out to be as big a seller as Keener seems to think it will, then mass production of the cottage should permit the firm to finally reap some economy of scale benefits over the next few years.
Finally, a word to the Foolish: As we've warned in the past, the analyst estimates for how much Palm Harbor will earn in any given quarter run the gamut from bliss to disaster. That "$0.03" you see near the top of this column sounds more definite than it is. The actual low estimate here calls for a $0.07 loss, and the high estimate predicts a $0.12 per share profit. In other words, just about anything could happen come Tuesday, and the least likely outcome of it all is that Palm Harbor will earn exactly three pennies.
Competitors:
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Berkshire
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Cavco (Nasdaq: CVCO )
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Champion (NYSE: CHB )
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Coachman (NYSE: COA )
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Fleetwood (NYSE: FLE )
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Fool contributor Rich Smith does not own shares of any company named above.
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