After producing three consecutive consensus-besting quarters, Nobility Homes (NASDAQ:NOBH) merely met analyst earnings estimates last quarter. But might Thursday's news on fiscal Q4 2006 results mark the homebuilder's return to its winning ways?

What analysts say:

  • Buy, sell, or waffle? Two analysts follow the stock. One still rates it a buy; the other has backed it down to a hold.
  • Revenues & Earnings. Neither analyst publishes sales estimates for Nobility, but on average, the two of them expect the firm to produce $0.41 per share in profits, down 11% from last year.

What management says:
You already know what the big news at Nobility was this quarter -- the firm's putting a name to its previously amorphous plans to "explore strategic alternatives." I suspect that what most investors will be looking for from Nobility in Thursday's news will be more information along these lines -- whether Savvian Advisors has begun fielding bids to acquire Nobility, whether current management is one of the bidders, and so on.

What management does:
But with the firm reporting record sales and profits growing even faster last quarter, is the prospect of selling out at a small premium really what should excite investors? After all, the firm has done a fine job of expanding its gross and net margins in a tough business environment, and has kept its operating profits rolling in at the same strong rate for three quarters in a row.

Margins %

5/05

8/05

11/05

2/06

5/06

8/06

Gross

27.7

28.2

29.0

29.5

29.5

29.6

Op.

14.4

14.7

15.4

15.7

15.7

15.7

Net

10.2

10.4

10.9

11.2

11.3

11.4
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:
Maybe, maybe not. Because as good a job as Nobility has been doing, it would be tempting fate to ignore the cautionary words being sounded by company President Terry Trexler. Words like: "very competitive and difficult environment," "reduced Company backlogs," and "volatile pricing in lumber, O.S.B., sheetrock, steel and oil related products and services." Trexler warned last quarter that he expects both sales and earnings to face pressure "for the remainder of 2006," which of course includes the numbers to be reported on Thursday.

The risks aren't confined to the income statement, either. As I've previously pointed out, what concerns me most at Nobility is what's going on over on the balance sheet. Granted, it's still solid, with loads of cash, and no long-term debt. But if you take a look at what's happening with working capital, I think you'll agree the trend is not good. Six months ago, I pointed out that sales were rising at 15%, but inventories were up 37%. Six months later, sales growth has halved, rising just 8% year-over-year for the last six-month period. And although it's true that inventories are also growing more slowly, at 33%, they're still rising four times as fast as sales.

That's a trend guaranteed to reduce free cash flow eventually, if not reverse it, and just as you'd expect, the company has generated only half as much cash profits in the last six months as it did in the equivalent period from the previous year.

Competitors:

  • Palm Harbor (NASDAQ:PHHM)
  • Fleetwood (NYSE:FLE)
  • Champion Homes (NYSE:CHB)
  • Cavco (NASDAQ:CVCO)
  • Berkshire Hathaway (NYSE:BRKa)

For a slightly different take on Nobility, read:

Berkshire Hathaway is an Inside Value recommendation. Where are the unfairly punished stocks, the undervalued enterprises? Philip Durell and his merry band of Fools at the Motley Fool Inside Value newsletter service are standing by, ready to lend a hand with the valuation scenarios. Try out a30-day trial subscriptionto see whether bargain-hunting is right for you.

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