Foolish Forecast: Palm Harbor Docks

Four months ago, manufactured housing builder Palm Harbor (Nasdaq: PHHM  ) stunned its critics, posting profits that exceeded consensus analyst estimates by a full 50%. Tomorrow, the company aims to build on last quarter's results as it closes out its reporting on fiscal 2006. Palm Harbor reports fiscal Q4 and full-year 2006 results after market close on Tuesday.

What analysts say:

• Buy, sell, or waffle? Just two analysts follow Palm Harbor. One says buy, the other sell.
• Revenues. Analysts project $170.6 million in sales for the quarter, a year-over-year increase of 16%.
• Earnings. Profits are set to explode skywards, up from $0.01 a year ago to $0.19 tomorrow.

What management says:
Reporting on last quarter's results, CEO Larry Keener pointed out that FEMA-contract revenue for the quarter amounted to only $12.3 million, or about 6.4% of the total. Even without the additional business created by the need to house hurricane survivors in the South, sales would have grown an impressive 17% for the quarter.

Based on last quarter's accomplishments, and the trends management was then seeing in early-fiscal-Q4 business, Keener opined that the company was "on track for sustained profitability." In addition to predicting continued success in (calendar year) 2006, Keener observed that "Palm Harbor has continued to outpace the industry throughout fiscal 2006."

What management does:
The company's claims of a turnaround are supported by its recent trends in margins. Rolling gross margins are up 80 basis points over the last 18 months, and Palm Harbor has reversed its operating and net losses, moving its income statement back into the black.

Margins %	9/04	12/04	3/05	6/05	9/05	12/05
Gross	25.8	25.3	25.8	25.7	25.6	26.6
Op.	(1.3)	(1.3)	0.6	0.8	1.6	4.1
Net	(1.5)	(1.5)	(0.6)	(0.4)	0.2	1.5

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:
Of course, we're still just talking "accounting profits" at this point. Real, cold, hard cash profits -- free cash flow -- have yet to make an appearance at Palm Harbor. Over the last two quarters, the company reported $5.3 million in GAAP net profits, but negative free cash flow of $11.2 million. That continues what we've seen in each of the last two fiscal years, in which negative profits were dwarfed by much larger negative free cash flow.

The good news: In each of the last two years, fiscal Q4 has been the strongest free cash flow producer of the fiscal year for Palm Harbor. If the company holds true to form, tomorrow we could well see Palm Harbor return to the black on both a cash profits and accounting profits basis.

Competitors

• Drew Industries (NYSE: DW  )
• Cavalier (AMEX: CAV  )
• Cavco (Nasdaq: CVCO  )
• Champion (NYSE: CHB  )
• Coachmen (NYSE: COA  )
• Fleetwood (NYSE: FLE  )

Drew Industries is a selection of our Motley Fool Hidden Gems newsletter service.

Fool contributor Rich Smith does not own shares of any company named above.