Um, wasn't this supposed to be hurricane season? Champion Enterprises (NYSE:CHB) investors were hoping it was, but with Mother Nature apparently off at a day spa for the last three months, optimism about this company's prospects for reaping another round of last year's FEMA-sponsored profits evaporated -- taking roughly half of the firm's market capitalization with it. Going forward, it looks like the maker of factory-built homes will be valued less on hopes for hurricane-induced (pun warning) windfalls, and more on what it has actually accomplished on its own.

Speaking of which, on Tuesday, Champion will tell us what it accomplished in third-quarter 2006.

What analysts say:

  • Buy, sell, or waffle? Champion gained another analyst since last quarter, and now boasts five. Four rate it a buy, and one a hold.
  • Revenues. On average, they think sales grew 11% last quarter, to $372.8 million.
  • Earnings. And that profits were cut nearly in half, down to $0.11 per share.

What management says:
Last month, Champion announced the sale of its San Jose Advantage Homes business for $44 million cash, plus an $8 million IOU, choosing to focus more on manufacturing while leaving the retailing to others. The firm maintains a five-year supply arrangement with the buyer, Bayshore Advantage.

Hunkering down and focusing on what it knows best seems a good idea, considering the continuing downward trend in this industry. According to CEO William Griffiths, the manufactured housing (MH) industry, ex-FEMA buying, declined nearly 4% last year, and another 4% in the first half of this year -- and: "We see no evidence that this trend will reverse in the second half of the year."

What management does:
The key to that statement being "ex-FEMA." Unfortunately, although Griffiths can remove FEMA buying from the picture and break down the situation for his industry for us orally, his firm's numbers naturally incorporate the FEMA buying (thus painting a picture that's prettier than fact). So when we see in the table below that gross margins have been declining for well over a year, and that operating profitability was, at last report, no better than a year ago, sure, that sounds bad -- but the situation may be even worse if the Feds have no reason to step in and provide contracts to the company in the future.

Margins %




























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:
By the way, don't get hung up on the fat net margin you see in the last quarter's rolling results. That's due almost entirely to the effect of a $108 million tax credit recorded last quarter; and speaking of rolling results, that credit will continue to inflate the rolling net for the next three quarters. Just a word to the Foolish.

So let's summarize: The MH industry's still in a funk. Hurricanes went AWOL this year. Next week marks the industry's return to the pre-Katrina era. And Champion's net is going to look a lot better than it really is for the next nine months. All of this adds up to one last bit of Foolish advice: If you're looking at Champion's price decline as opportunity knocking at the door, make sure to give this company a long-term, hard look through your due diligence peephole before opening up (a position).


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What did we expect out of Champion last quarter, and what did it accomplish? Find out in:

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