Palm Harbor: Next in Line?

In a companion column to this one, I looked at Champion Enterprises (NYSE: CHB  ) -- an erstwhile unprofitable twin to Berkshire Hathaway's (NYSE: BRKa  ) (NYSE: BRKb  ) profitable Clayton Homes subsidiary. Champion is getting its business back on track, generating free cash flow, and even earning some GAAP profits. Writing that piece, however, drew my attention to modular homebuilder Palm Harbor Homes (Nasdaq: PHHM  ) and its own quest to end a multiyear trend of declining sales and earnings.

Over the past five years, Palm Harbor has gone from $650 million in sales to $573 million, then back up to $610 million at the close of the company's last fiscal year. Profits have moved in tandem, beginning the five-year period at nearly $20 million in annual net earnings and sliding down toward the $6 million loss recorded in fiscal 2004, before beginning a climb back toward breakeven that, with any luck, the company will complete this year.

On the surface, the company's fiscal-first-quarter 2006 earnings report, released last week, suggests that Palm Harbor is off to a good start. Sales growth remains pretty anemic, at just over 5%. Earnings growth, on the other hand, was explosive. Net profits for the company increased a staggering 150% over the company's Q1 2005 numbers. Profits per diluted share grew "only" 140% -- but the discrepancy between the two figures owes more to the effects of rounding total profits as they're converted into the pennies of profits per share. The usual culprit when per-share profits don't match total profits -- stock dilution -- was conspicuously absent from Palm Harbor's earnings release, which showed rather a small decrease in shares outstanding.

Other good news included a slight decline in accounts receivable, from $54.7 million one year ago to $51.7 million in the quarter just ended. Inventories, on the other hand, grew from last year's $115.2 million to reach $127.5 million -- twice as fast as sales growth, which is not a good sign.

Even so, a turnaround does appear to be possible here, and investors are well advised to observe Berkshire's example and take a look at companies in this industry. Just remember to choose carefully when you do so, as some, like competitor Fleetwood (NYSE: FLE  ) , do not appear to be completely out of the woods yet.

Industry turnarounds take time. When choosing an investment, you should, too.

Fool contributor Rich Smith owns no shares in any of the companies mentioned in this article.