Trailer Park Treasures

Trailer parks get a bad rap. It's partially deserved -- they are, after all, the setting for the pseudo-autobiographical Eminem flick 8 Mile. But in addition to serving as a breeding ground for potty-mouthed bleached-blonde rappers, mobile homes and manufactured houses (their mobility-challenged cousins) serve several useful purposes.

First, they provide affordable housing for people still working their way up the economic ladder. Second, they provide economical means for citizens, both wealthy and not yet so, to travel the country in relative comfort on holiday. Third and most pertinent to current events, they provide a means for the Federal Emergency Management Agency (FEMA) to put roofs over the heads of survivors of two major disasters -- Hurricanes Katrina and Rita.

Contracts aplenty
In the wakes of these two megastorms, several companies associated with the recently struggling mobile- and manufactured-homes industries have benefited from a surge of investors interested in capitalizing on FEMA's need for cheap, rapidly assembled housing. On Sept. 21, Monaco Coach (NYSE:MNC), a firm known best for its ultra-luxurious mobile home offerings, announced that it expects to manufacture as many as 2,000 to 3,000 mobile homes for use in FEMA's disaster relief efforts on the Gulf Coast. That same day, Champion Enterprises (NYSE:CHB) reported a contract of its own to build 2,000 manufactured homes for FEMA. Two days later, Thor Industries (NYSE:THO) reported that September saw 13,000 orders for towable trailers, with many of those sales going to dealers selling to Katrina survivors. Fleetwood (NYSE:FLE) announced that it, too, sees its business booming, with orders for 7,500 trailers and 3,000 manufactured homes already placed by FEMA.

These are only the announced contracts. In all likelihood, other companies in this industry have orders they haven't disclosed publicly. Even if they haven't, with so many of their peers working flat-out for FEMA, it's likely that any capacity not yet devoted to housing hurricane survivors will be strained just satisfying ordinary consumer demand. As a result, shareholders in Palm Harbor Homes (NASDAQ:PHHM), Motley Fool Hidden Gems Watch List stock Winnebago (NYSE:WGO), and Coachmen Industries (NYSE:COA) are likely to see their companies report attractive numbers in coming quarters.

Altruism and capitalism
As individuals, we naturally empathize with our fellow citizens and do all in our power to assist them in their time of need. At the same time, as investors, we should not turn a blind eye to the possibility that nature's fury may have sparked a real turnaround in this industry. These two points are not at all contradictory. By investing in an industry that does so much to help house the suddenly homeless, we're providing the capital these companies need to remain viable, so that they'll be there to help out in future disasters (Heaven forfend).

With those two goals in mind -- altruism aligned with profit-seeking -- today I'll lay out a few numbers to help Fools judge which companies are best positioned to capitalize on this industry's possible turnaround.

A two-horse race
At the risk of belaboring the obvious, the chart above makes it clear that two of the seven big mobile- and manufactured-housing companies have established a clear lead over their brethren: Thor and Winnebago.

Not only are these two companies the cheapest from a basic P/E point of view, but their respective returns on invested capital and profits per dollar of revenue both command leads two to three times as large as Champion, their next best competitor. Meanwhile, they're the only two of the bunch that have more cash than debt on their balance sheets.

Both of these businesses have fared reasonably well over the past few years. Remember, these years fell partly in the depths of a post-Bubble stock market gloom in which both companies' customers could not have been feeling particularly wealthy. In that time, these same customers saw the cost of fueling mobile homes, and of fueling trucks needed to tow trailers, double with the rising cost of gasoline. That Thor and Winnebago have managed to remain profitable on both a GAAP and free cash flow basis speaks to the competence of their respective management teams.

Consequently, it seems likely that as the overall business environment for this industry improves in the wake of this month's twin hurricanes (and remember, hurricane season still has a couple of months left to run), these are the two horses on which you'll want to place your bets. While all participants in this industry stand to benefit from FEMA's need for quickly built housing, these two contenders look most likely to put some serious distance between themselves and the rest of the pack.

Even before the hurricanes struck the Southeast, Motley Fool Hidden Gems lead analyst Tom Gardner had identified Winnebago as a potential Hidden Gem, terming the company "well positioned for the long run" based on the company's core business of selling motor homes to America's footloose and near-retirement baby boomers. See, it doesn't always take a force of Nature to stir up promising investment ideas -- all you really need to do is subscribe today.

Fool contributor Rich Smith holds no financial position in any company mentioned in this article.