So I understand that last week, recreational vehicle and manufactured housing company Drew Industries (NYSE:DW) reported earnings.
[Cue sound of crickets chirping.]
What? Nobody's interested in motor homes and trailers?
[More crickets.]
Well, that's funny. Because I also understand that not two years ago, Warren Buffett's Berkshire Hathaway (NYSE:BRKa) (NYSE:BRKb) bought a manufactured homes company of its own.
[Crickets' jaws drop a very short distance to the floor. Chirping ceases.]
When Berkshire bought Clayton Homes in 2003, the company was trading for roughly 0.8 times what would prove to be $2 billion in fiscal 2004 sales. Today, Drew is trading for just 0.7 times 2004 sales. Sure, Drew is just a parts manufacturer -- not the industry leader in building manufactured homes, as Clayton is. But Drew is no bit player either, commanding greater than 50% market share in several of the products it manufactures. So the company's worth at least a little attention. Let's look at a few numbers.
In Q1 2005, Drew experienced a 43% rise in sales but a 3.5% decline in profits per diluted share. In part, the diverging results arose from higher raw material costs for the parts Drew makes. The company has been passing on raw materials costs to its customers, which include companies such as Clayton, Thor Industries (NYSE:THO), Fleetwood Enterprises (NYSE:FLE) and Champion Enterprises (NYSE:CHB). But Drew's been doing this "at cost" -- meaning it's not charging the little extra needed to maintain its past profit margins. Potential legal trouble also hurt profits; Drew took a $0.12-per-share charge to cover its possible need to pay a sizeable legal judgment relating to a workplace accident.
The good news this quarter was that free cash flow re-emerged into positive territory at $4.5 million. Considering that over the previous 12 months, Drew had $18 million in net cash outflows while upgrading its factories, that's a promising development. Another good sign: the company expects to halve last year's $27 million in capital expenditures in fiscal 2005.
If this company's going to have any hope of earning the crickets' respect, it has to get back in the habit of creating some cash.
Fool contributor Rich Smith owns no shares in any of the companies mentioned in this article.
