Chit Chat Stocks - Legacy Housing (Ticker: LEGH) with WealthOrDie

Episode Date: March 30, 2023

Legacy Housing (Ticker: LEGH) designs and sells manufactured homes, with high demand in the current housing market, but also faces supply chain and regulatory challenges in a competitive industry. Listen as Brett and Ryan ask questions about the company, its business model, and valuation. Enjoy the show! ***************************** This episode is sponsored by Stratosphere.io, a web-based terminal for financial data, KPIs, and more. Try it out for FREE or use code “CCM” for 15% off any paid plan. Sign up here: https://www.stratosphere.io/ ***************************** Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney  Subscribe to our Substack to receive free show notes and charts that go along with every episode: https://chitchatmoney.substack.com/ Interested to see more of Phillip's work? Check out their Twitter here: https://twitter.com/WealthOrDie?s=20 Contact us: [e-mail] Timestamps Legacy Housing | (3:35) Housing Prices | (17:15) Why is it Discounted? | (28:21) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. My name is Ryan Henderson, and I am joined by my co-host, Brett Schaefer, as always. Today, we have our Thursday deep dive episode where we interview an analyst or an individual investor to discuss a single stock or industry. And today we have on a friend of the show, a longtime friend of the show, I guess, Philip from basically met through Twitter. His Twitter handle is at wealth or die. And he's talking about Legacy Housing Corp, A little pitch for Philip here. He, I think, undersells himself as an investor. You can tell he is a really high quality thinker and he kind of digs in the same realm or fishes in the same pond as us for investments. And this one's really interesting. And he's done a lot of digging on the

company. And you can tell when you listen to this interview that he knows the business quite thoroughly. But before we get to that, we want to talk about our presenting sponsor. As many of our recurring listeners know, it is Stratosphere. Stratosphere is our investing home screen for fundamental research. They've got awesome data visualizations. They have, I believe, they just recently added, and Brett, you can correct me if I'm wrong, a press release aggregator for the companies you follow. So they had SEC file aggregation, and now they've added press release aggregation, which is just huge, huge value add. Yeah. Yeah. Yeah. That's, that's really helpful. And then on top of it, uh, if you have a paid plan, you get unlimited custom built, uh, KPI

tracking. So, um, that's one of the best benefits of their platform. And you've probably heard us talk about it before, but you can get company specific metrics, uh, instead of just your typical financial metrics, um, which, which I think is just really unique. And I don't know any other platforms that do that. So once again, go ahead, check out stratosphere.io. We use it every day. We think you should too. If you're interested in a paid plan, because they do have a number of different ones, and I recommend everyone kind of check them out because you get a lot of the benefits that you wouldn't if you're just the free user. Use promo code CCM, you get 15% off any of those. Anyway, if you're more interested in the platform,

stick around after the episode. We got a three-minute interview with the Stratosphere founder, Brayden Dennis. But without further ado, here's our interview with Philip. Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chitchat Money by Ryan or Brett or any other podcast guest is not formal advice or recommendation.

Now, please enjoy this episode. All right, welcome in. Today, we are joined by our friend, now second-time guest, I believe. I think it's only been two. Philip from Twitter, his handle is at Wealth or Die. I'm getting that right? That's correct. Okay.

And so today, you kind of had this, I guess, teasing post about a specific company that we're about to talk about, Legacy Housing Corp. And it kind of caught my interest, so I asked if you wanted to come on the pod, and you were gracious with your time. You kind of explained it before we hit record, but I want to talk about it again. How did you come across this to begin with? It's kind of an interesting story. So how did you – I know the answer, but maybe explain it. And then how did you turn from, oh, okay, this isn't what you were looking for? Yeah.

So I initially found this company because I was actually screening for frauds. I was trying to find companies to short, companies that I thought were doing something improper. and you know kind of one thing you'll know you know fraud 101 is companies that report earnings but have absolutely no free cash flow because a lot of times what that means is they can be overstating their earnings and a lot of it's getting tied up in working capital maybe it's AR maybe it's inventory you get these super bloated balances and then all of a sudden there's a gigantic write-off and all the earnings they've been saying they've had aren't actually real so I saw this company and when I first saw it I was like oh my god this is like this has to be one

like they're they're posting like 10 years of earnings and never has posted free cash flow so I you know pulled up the 10k started reading through what was going on and then like you know pretty quickly I was like wait a second this is not like a fraud this is actually a really good business um but when you screen for it um and we'll get into why but when you screen for it it looks like they don't generate any cash but they actually do is is it just the like kind of one of the negatives or you could guess you could call it negative of being a home builder where uh and i guess they're manufactured home builder but the capital is all tied up in the homes um so it's actually it's not really a negative of the business model at all to a

certain extent it's a choice that they make to invest the cash back into the business and i said i guess i would say it's a negative of the accounting treatment um so we can get into that a little bit later i don't i don't want to start off the uh not a negative yeah yeah i guess i didn't mean we did a little uh we did a little home builder month for like we looked at a bunch of different home builders and a lot of them had that same basically accounting treatment and so uh i was just making sure i guess that's the reconciliation but uh yeah we don't want to start off with some boring accounting spiel so uh Maybe can you just dive into what Legacy Housing Corp is and the basics of the business?

Okay. So Legacy Housing is in the manufactured housing business. So what that essentially means is they make, you know, single wide trailers, double wide trailers. Like you guys know what these types of homes are, typically lower end. you build them in a factory, aka, you know, you manufacture them, and then you ship them onto site, right? So, they're not a traditional home builder. They don't buy land, send crews out to build the homes on site. They have factories, they build the houses there, and then they ship them out. The homes range from about 350 square feet, because they make the little tiny homes

that you might see on TV or Instagram, all the way up to 2,500 square feet, which is a pretty decent sized home. The prices range from $33,000 to $180,000. And the typical customer of theirs makes $75,000 or less, which is 50% of the US population. So that's a little bit of the background and in terms of the business, um, in terms of the history, it legacy was founded in 2005, kind of by two West Texas entrepreneurs, Curtis Hodgson and Kenneth Shipley. And, uh, if you ever listened to an earnings call, like these guys are about as like Texas as it comes, like the thickest accent you'll ever hear. It sounds like they're just chain smoking cigarettes all day. Um, they're pretty, pretty intense guys to listen to.

But they were in, you know, the manufactured housing business and various roles, jobs, businesses for many years before that. But they kind of came together and founded Legacy in 2005. So they grew that over the next 13 years, including through the financial crisis. And eventually it led to the IPO of Legacy in 2018. And I think when they IPO'd, they were somewhere between $10 and $14. And today they're around $22. So they've done a pretty good job growing, you know, the value of the company over that time. And we'll get into probably a little bit about their management philosophy and their backgrounds when we talk about some of the issues they've had.

But in my opinion, these two guys who founded the company, it's a little bit Buffett-esque because they just seem so honest, forthright, hardworking, conservative type guys who just want to run the company for the long term and do the right thing. And that has really attracted me to this business as well. Like these aren't professional managers who are managing this publicly traded company. This is like an entrepreneur, small business that's listed on the public markets. In terms of like, I guess, just more on how the business works, are they selling direct to like customers or is there some sort of intermediary there? Yeah, that's a good question. So let's talk a little bit about the business itself. So there's three main components. They have the actual factories, of which they have three factories. They also own 13 retail outlets. So that's literally like you can go to these stores and you can purchase the manufactured homes from them. and they also have a credit and loan arm. And what that means is they provide financing

for the sales of their homes. So I think about this business in terms of those three businesses, factories, retail outlets, and then the credit arm. The retail outlets to a certain extent, not as important. So one of the factories is in Commerce, Texas. They have one in Fort Worth, Texas, and one in Eaton, Georgia. So they're very focused on the southern half of the country. The first factory is 100,000 square feet. Second factory, also 100,000 square feet. The third factory is almost 400,000 square feet. To jump over to your question about who they're selling to, so typically people purchase these homes from a retail outlet. You may be able to purchase online, purchased from a retail outlet. They have about 150 other, I guess I'd say distributors or retail

organizations that they sell to. So they have their 13 plus 150 other retailers that purchase the homes from them and then sell them to the customer. Another thing they do is sell directly to the mobile home park. So if you guys are familiar with the industry at all, there's even a couple guys on Twitter who are mobile home park investors. So they go around, they buy these businesses. Most of them are legacy businesses, not a lot of new ones being created. But depending on how you run that business, you might be purchasing the homes and renting them to other people. And so those manufactured home parks will purchase directly from them. And those are pretty much the two main sales outlets, independent distributors and mobile home

parks that contract directly with them. Perfect. And we wanted to talk about the difference between manufactured housing and regular home building, but I think we can combine it with this next question because it does play into the industry dynamics as well. So industry dynamics matter a lot for housing companies. How do you think the housing market is set up to either help or hurt, you know, legacy housing's demand or basically how they fit into the industry? And how do you see them versus the regular home builders? Are they going to do better? Are they counter cyclical? What's your, I guess, after reading up on the company, what's your take on that? So that's a very good question. I personally, and I'm probably over

optimistic. But I think that manufactured housing is absolutely incredible. I think it's like such a good business. I think it's far better than the typical home building industry. I think it's starting off from a place that is probably one or two steps behind. But I think, in my opinion, like the long-term like outlook for this business model is probably far stronger than site-built homes. So I guess like we can dive into why that is. So from a manufactured housing standpoint, like this company has three factories. So they produce about 3,000 homes a year out of those factories. When you're building in a factory, you have very consistent quality standards, right? Same team, same process. You have an exact design that you know what to build for. It might

be customized a little bit, but like this is like a very kind of predictable production center. Now with site-built homes, you know, I know there's tons of people in the industry. It's super distributed. But a lot of what happens is even some of the biggest home builders are contracting GCs and they get other teams, different people do the foundations and then build out the home, do the interiors. So it can vary, like the construction itself can vary widely depending on who's being employed. And typically those are third parties. I think in the longer term. So I'll take a step back. One of the interesting things I heard about the manufactured housing is like one of the cool new things is something called modular housing, which I guess

I would say is pretty much just manufactured housing, but high end. So modular housing, the point is supposed to be you're producing the parts of the house and modules, and then you're connecting it all on site. And one of the interesting things I heard is that on the East coast, a lot of the homes need to be built to be hurricane resistant. So a lot of the homes on the beaches are actually built using a manufactured housing approach. You know, it's not a single wide trailer, it's not a double wide trailer, but it's the same production technique. And the reason why is because when they build these homes and you have to transport the house on the highways, it has to be built to a very, very high level of quality to withstand that. And so essentially,

what they found out is that these techniques are perfect for building hurricane and wind resistant housing. And so essentially where I see the industry going is that it's very capital efficient and quality like predictive in these factories. And what I think is going to happen is that more and more upscale homes are going to start being built using these techniques. And therefore, there will be less site building homes as a percentage. and more of these homes built in factories.

And that's what I think is an exciting opportunity for this industry that not many people even think about. Are those essentially the higher average selling prices then on those as well? Oh, yeah. I mean, I've looked into modular homes myself, and typically the people that I saw offering the services, the homes were built to a very, very upscale quality. and they would be they would charge much more than the average home in order to produce that

you know house um but the thing is is that when you manufacture homes in a factory you can produce them for i'm going to say about you can go and look in legacies 10k for the exact number, but I think it's about 40% less per square foot than a comparable home. And that's where I think the main advantage is. Housing prices have gotten so costly to build these houses and even pay for existing ones. I think there's a huge arbitrage to move more production to these factories and be able to sell them at the market price for a regular home, if that makes sense. Okay. This might be a tough question to answer, but Brett and I have talked about this a number of times, and I don't think it's a very unique opinion, but interest rates have risen,

home prices haven't dropped by that much. It looks like affordability is a big issue right now, which makes me think either home prices are going to come down or there just isn't going to be a lot of home sales. Do you think legacy housing would be insulated from that at all since they're already kind of catering, I guess, to the lower, they're on the lower side of things with the average selling prices or would they also be affected? Yeah. So I think it's a great question and I don't really know the answer, but I think the two things that you'd want to think about is A, the affordability is very bad, but there's also not a lot of supply and that's why prices really haven't gone down. From Legacy's perspective, you know, the rates being up is hurting their

consumer, right? It's harder to get outside financing for these purchases. Like that does not help them in any way, shape or form. However, when you have this huge differential between I can pay $180,000 for a 2,500-square-foot home. Then I have to buy the land. Let's say it's $40,000. And then I have to also pay to put the foundation in and attach it to the ground. You might be all in for, let's say, $250,000. You're probably not going to buy a 2,500-square-foot home for $250,000 dollars in today's environment, right? It's a very low cost. And so I think the higher affordability hurts them, but to a certain extent, it also helps them because they are the lowest cost provider. And I think that it will help customers shift from, hey, I can't afford a

regular home, but I can do this and it's pretty inexpensive for me. Essentially shift down market. that makes sense um what i guess who are the main competitors in the manufactured housing space uh is there anyone that's like a big national player or is it kind of segmented by uh regions yeah so they're the fifth biggest um producer um berkshire hathaway owns a company called Clayton Homes, and they produced 50,000 manufactured homes in 2022. The industry itself sold, I think, 112,000 last year, or that might be 2021 numbers, but they are the big dog in the room. Clayton Homes produces roughly 40% to 50% of all manufactured homes in the country. there's two other publicly listed companies um one of them's called cavco and the other one is

called skyline skyline champion and they're also quite large um probably about 10 times uh the size of legacy five to ten times so those four companies and i and i don't know the last one but those four companies you know are the majority of the production in the united states And one of the interesting things that has happened is if you look at a graph, pull up the legacy 10K, it's like the first graph. The production of manufactured homes in the U.S. used to be like 10 or 15 or 20 percent of all homes built. They were producing hundreds of thousands of them per year. And when 2008 happened, a ton of them went bankrupt because it was a very distributed industry. and many of the smaller players or the over levered players went bankrupt and there was

huge industry consolidation. So there are actually a lot of manufactured, of small manufactured housing companies, you know, in the Midwest, if you go to Wisconsin, you go to Michigan, you go to Indiana, there's tons of small ones that sell these homes, but the majority of the sales are from the ones who are quite large. Yeah. It's probably pretty nice to have Berkshire Hathaway as a competitor because you know that they're not going to try to pull maybe like a door dash or something like that and have no margin on their products. They do like to act rationally and it sounds good. But let's move to the loan book. I think that's something probably people would be interested in when looking at this company. What do you think of the loan book?

and it seems to have held up well, but do you think, again, any thoughts on, you know, the rising risk of defaults in this current environment? Okay. So when we talk about the loan book, I kind of want to talk about the valuation in total. So I'm going to run you guys through how to value legacy housing, because I don't think many people understand it or at least have the view that I have of the company. So they reported earnings a couple of weeks ago, the stock price went up like 15%. It's 22 bucks a share now. And that means it's a market cap of $550 million. In 2022, they generated $68 million of net income. $28 million of that was interest income from their loan book. So that means of the 68, 28 is from interest,

40 million is from the actual manufacture and sale of the homes. So in total, 12% earnings yield, eight times earnings on a market cap basis. Now, when you look at the enterprise value, and this is where I think people don't really understand the company, it has a $550 million dollar market cap, you add in the debt of $0, completely unlevered company. And then they have $280 million of loan assets and $8 million of treasury investments. So you subtract that from the market cap, it's an enterprise value of $262 million. Now, since we just removed all the net loan assets, you can't include those earnings when you look at it on an EV to EBITDA basis. So, essentially, what you do is $262 million enterprise value and $40 million of net income, add back the $10 million that they pay in tax, and the EV to EBIT ratio on the manufacturing business itself is five times.

Does that make sense to you guys? Yeah, it's good. Here's, I guess, what people are going to have to push back on generally with housing companies is how much gets generated to cash flow. I know you mentioned that they had that problem. What are your thoughts of that dynamic? And does it matter? Are they able to return cash to shareholders or do they keep reinvesting for growth? So that's a great question. So in the past, they had a small dividend. They've done share buybacks. I'd consider the management team very shareholder friendly. They listen to people. They want to do what's right.

They generally reinvest every single dollar that they have back into the loan book. And that's why when you look at their accounts, it shows them generating zero free cash flow because when essentially they extend this credit to the consumer, that happens in the cash from operations section. So when you look at that, the cash from operations is usually intentionally zero because every dollar they make manufacturing homes, they then extend out in loans and have a loan asset. So I think that kind of answers your question about free cash flow. But one thing I'll say is that they had a little snafu in the past. They had some trouble issuing 10 Ks, right? And we'll kind of talk about that. But I think one of the things that's really interesting to see

is they used to run with some debt, I think about 40 to $50 million of debt on the balance sheet. And I think essentially the story is in 2022, they had 10 K problems in 2021. You know, they were technically outside of the covenants of that debt because they couldn't issue their 10Ks in a timely manner. And so what they essentially did is they're like, you know what, rather than have this debt, our 10Ks are late, let's just pay back all the debt. So in almost every single year, cash from operations is zero. And then in 2021, they generated $60 million of cash from operations and they paid down roughly $35 million of net debt. So that is a good example I would say of showing you they have the ability to stop financing these sales, to stop investing

into the loan book if they need to and generate actual cash flow because they just did it in 2021. However, from their perspective, you know, you get to extend loans. And essentially, the breakdown is, if they make a loan to a mobile home park, it's done at about a 9% interest rate. If they make a loan to a consumer, it's about a 13% interest rate. So all said and done, it's about 11% net interest rate, I'd say, on average of the 200 and what was that $80 million of loans that they have extended 140 is the mobile home parks 140 is the consumer. So that's how you get to a net 11% average interest cost. Now, if you're generating cash and you can reinvest that into this loan book and, you know, make a return on your cash of 11%, I'd say that's, you know, an ROI positive decision, right? That's a great return on your money, and that's an unlevered return. You invest a dollar of cash, you make 11% on that per year, and that's what they want to do is keep reinvesting into that business. I guess it almost sounds – I don't want to say too good to be true, but it sounds like a very blatant thesis, and it sounds really cheap. what's what do you think investors are looking at and saying or why do you think investors are

discounting that so most of the people that i bring this idea up to really don't like the lending business and if you just look at what happened with silicon valley bank or frc everyone who says when you make loans might not be today might not be tomorrow but they go boom right because eventually you will make a mistake, you'll make bad loans, and then everything comes tumbling down. I think that's one of the reasons that people cannot get comfortable with this company is because, you know, especially for the past couple of years, they've had super good underwriting, very, very little, you know, non-payments or write-offs on the loan book. And it feels like a too good to be true scenario. And they'll go up in the future a couple of points

for sure, especially as economic times get a little bit worse. But the thing that I don't think people understand is you have $280 million of loans that you've extended. That's an asset. There is no offsetting liability. The company has zero debt. They don't have deposits. There's nothing on the other side of the balance sheet. It's literally just cash they've invested. They could have invested it into stocks and left it in the company if they so choose. Or bought back, right? It's the same thing as... Yeah. It's their cash. They could do whatever they want with it. But what people don't understand is there's no liability. So let's say the worst recession in the world happens and 10% of that loan book gets written to zero next year. Now, if you're a bank,

that is an absolute catastrophe for 10% of your loans to be written down to zero. I don't even know how many would survive. But if you're legacy housing, you have $280 million, 28 million of them go boom. And then what are you left with? 252 million of net assets. Okay. Next year, you're going to make 10% on them and you'll be back up at 28 million in a little bit over a year. right so the balance sheet is like extremely strong even in a worst case scenario you might lose one maybe two years of net asset value or earnings so there's nothing to really fear other than something from an earnings perspective uh in my opinion no that's that's a great overview You mentioned a little bit, but thoughts on management and thoughts on the recent changes they've made.

It seems like the founders potentially, and you may be looking at it more in depth. It seems like maybe they're getting ready to leave. I don't know if they're kind of priming some new guys to come in and take over, but what are your thoughts on that? Yeah, so I mean, I think they're both of the age. I want to say they're both older than 65. I'm not quite sure on their ages, but they're both, you know, older. but they're both heavily involved in the business. And essentially they found someone who they thought was very interested in the company, former board member who could take over the CEO reins.

They're very involved with the business. They're not going anywhere. I don't think anything really changes from that perspective. You kind of got to hope the new guy's good at his job and all indications seem to point that he is, and they're still going to work with him and make sure things turned out okay. So the management change is not ideal because I think they're super great operators, but I think with them still being around and owning, I think it's over 50% of the company still. Not much will change from a strategic standpoint. They've had some turnover at CFO over the years. Like I said, they've been filing the 10Ks late and having to restate some of their earnings. And that has really sketched people out too, because they kind of

think that some sort of fraud might be being committed. They've also changed auditors plenty of times, which is fraud 101, that's a huge red flag. If you look at what actually got restated after the report was issued in 2021, they moved $2.5 million of COGS from one period to the other period, and it ended up changing their annual EPS. I think it increased by one cent. So they've had a lot of turnover at CFO. And I think that's more just a function of the two founders having very high standards for the CFO and them not living up to those expectations and kind of not doing what they need to do. I don't think any of those changes are indicative of something wrong with the company. I think it's almost a sign of something being right with the company

that they have these problems. They're a small business. They only have 800 employees, only a hundred of which are salaried, right? So your corporate department is extremely small at a business like this. And they have to comply with all these SEC regulations. And essentially, they've just been cycling through people until they could find someone to do the job correctly. Yeah, it is an interesting quirk of the small cap companies. Unless Ryan has any other follow-ups, maybe he can after this, if he has any. Last question that we always ask someone is the pre-mortem. How could an investment in legacy housing, do you think go poorly from here? How are you saying, you know, three to five years, what scenarios do you see where the stock,

you know, greatly underperforms the market? Yeah, that's a great question. So a lot of people, after I posted that tweet, were kind of talking to me how they wouldn't want to invest in this company because Berkshire Hathaway is too big. This one's too small and they just didn't like the scale advantage that other players might have. I don't really feed into that analysis. I don't think that would be what does this company in or what makes them underperform the market. I guess the one thing that I would say I could see happening is on the loan book side, they've been able to take that money and reinvest it into the loan book and make that 11%. And from what I'm told, they're very picky about who they extend the loans to,

right? And essentially, the loan books were $280 million. And if they loaned out all the money per year for all their sales, they could loan out seven years worth of sales if they kept reinvesting the money. That's how much they could build the loan book up to if they financed all their own sales. They don't want to do that, right? You want to make loans to the people who you think are going to pay you back and you want to leave the riskier clients for other outside parties. You don't want to take on that risk. So I think one of the things that might happen is from a reinvestment perspective, you can start running out of high quality clients to make loans to. And hopefully that means they stop extending the loans and they keep the cash

and put it somewhere else. But on the downside, they could start making bad loans instead of an 11% return. Now it's a 5% return net, right? So I think that's one issue. The other issue, and I'm not the expert on this, but traditionally it was extremely hard to get financing for manufactured properties. And essentially that's for various reasons, right? It's not really a house. It's not built on land. You can move it. So it was very hard to get financing for this. you couldn't just go to a bank and get a 3% mortgage for this purchase, which was great for them because they get to make these loans at a super high interest rate. So one of the risks for their business model is if the government and Fannie and Freddie, right, who kind of subsidized

the mortgages, I mean, now they're at 7%. So it's not as differential, but think back to three years ago, mortgage rates were 3%. They're charging 11. So one of the things that would kind of suck for them is if it became very easy to get credit for these purchases, they would not be able to keep reinvesting that loan book. And it would add nothing to do with their choice or the quality of the customer. It would just be that these people can get outside financing from the government or from an outside lender at a much cheaper rate. Now, ultimately, hopefully, you still get the cash from the manufactured side of the business, and we'll see what they can reinvest that in. But currently, they reinvest it into the loan book. So taking that away would very much hurt

how this company can compound their value. Sounds like it wouldn't be the end of the world at current valuations because they could just turn it into buybacks if that happened today. Yeah. And I think that's a very good point. You could buy back stock. You can give the cash away as dividends, right? It's a 12% earnings yield. So if they start actually drawing down the loan book, you're earning 12% for a while and you can return even more cash than that. I think that's great but but longer term for this company you know you want to keep seeing them reinvest into you know whether it be an investment or a business line that can earn above their cost of capital that's what really makes this company you know exceed in the long run okay i have a couple more

questions maybe just maybe i'll limit it to one but is the business growing are they delivering more units each year? Do you expect earnings to grow in the future? That's a great question. So the short answer is yes, it's growing. So let me pull up an income statement. So in 2016, they did $110 million of revenue. In 2022, they did $260 million. Now some of that's from the loan book growing, but that's relatively minor in the grand scheme of things. So they've more than doubled their revenue based upon pricing and based upon uh just unit volumes growing so if we go back to the factories they have the three factories the two in texas are a hundred thousand square feet and they produce a thousand homes per year they're at capacity they're not going

to grow materially from here so they're capped out there however the georgia facility is just under 400,000 square feet, and it still only produces 1,000 homes per year. So one of the growth levers for this company, and they actually were addressing some quality issues at that location in 2022, so they didn't grow units. They slowed down production. I forget how much they were doing per day, but they slowed down production by like 33%. They brought in outside consultants and said we're retraining the entire staff we're going to do this building correctly and then once the staff is trained we'll start picking back up production which i think is the right thing to do a lot of companies probably wouldn't have you know taken the hit to earnings

to do that um but for them the growth lever from a manufacturing standpoint will come from two places one the georgia facility ramping up production they have tons of capacity there And they can do more sales in the Southeast, especially. It's a good market for manufactured housing. The second thing is they essentially want to do an acquisition. They've looked at many businesses to acquire. They've looked at trucking businesses. They've looked at buildings, product businesses.

They've looked at a lot of things and been very careful about where they're going to put their money. And they really haven't done any major acquisitions. I even want to say over the past 10 years really nothing's happened and people always ask them well why don't you buy a competitor right why don't you get more scale and essentially what they've said is we're not going to make a purchase at the top of the cycle and pay a multiple on peak earnings. So they will most likely do an acquisition in this space, but it will not happen until they can kind of buy, you know, they can go bottom fishing essentially. So I think that would be great for them. They're pretty good operators. There's lots of smaller players that

they could purchase, um, to grow the manufacturing side of the business. Um, but it's not going to be most likely in the next 12 months while things are hot. All right. I think that's the last question I had. Brett, do you have any more? I was going to say, it sounds like Berkshire should have bought, should buy them if they didn't have a Clayton Holmes already. Cause that sounds like a classic Buffett, uh, management team, but yeah, that's all. that's my last observation. It's funny because Berkshire actually is, I don't think Skyline or Cavco really finances much of the loans as Legacy does, but Clayton, I believe did about 12 or 13 billion of sales last year and their loan book is 21 billion. So Clayton and Legacy have really

figured out like where the money's being made in this business. So I think that's great for both them all right well that is probably going to do it um philip for anyone that wants to follow you or keep up with uh any of your investments picks thoughts what's the best place to do that twitter at wealth and die i put out my ideas not that they're very good but they are hey they're the last one we did uh take yeah the last one we did it quite well so or the last one you pitched on the show did quite well. So you're on a hot streak of one-on-one so far. Let's see if we can make it two.

Thank you. All right. Well, that's going to do it. I want to throw a disclosure on this. I want to remind listeners that Brett and I are not financial advisors. Anything we say or discuss here on Chitchat Money is not formal advice or recommendation. We are, however, general partners at Arch Capital, so clients may have positions in the securities discussed in this podcast.

Thank you all for listening. Thank you, Philip, again, for coming on the show. And we will see you all next time. Okay. I'm welcomed by the founder of our exclusive sponsor, Stratosphere.io, Brayden Dennis. Brayden, welcome. I wanted to basically give listeners that are interested in Stratosphere, more context around what the platform is. So let's start there. What is Stratosphere and then why did you decide to start it? Yeah. Thanks for having me. I appreciate it. And I'm glad to be sponsoring the podcast as a listener myself. I like the deep dives. I like

the different guests, the different perspectives on some interesting companies. So I think it's a good concept for a podcast, which is kind of what led me down to making Stratosphere in the first place, which was I was making content online and frustrated with the tools that were available to me. So I started building a very scrappy version of the product just for free, just to figure out how can I overlay 10 years of financial side-by-side up to 35 years we have now, and how can I actually build out a proper database of company KPIs that are not just revenue but like if you're looking at like costco like how many warehouses do they have how many paid members are are in like our costco members or you know if i want to do a comp against like

the streaming like how many netflix subs versus uh hbo plus discovery plus no disney plus like how do i build up proper comps of those because those are the metrics that actually move the business those are the ones that actually move the needle more than any like gap financial metric you'll find and so it started off as just purely a passion project and i figured let's just make the leap into entrepreneurship and uh see where it goes and you know it brought brought us here today yeah and like you mentioned it it is the stuff that you can't find anywhere else at least not now i mean you could find it page by page and on their front exactly you can go through 35 uh pdf filings and find it. Be my guest. And that's basically what we did for a long time.

So what do, I guess, maybe describe the pricing model so people know, but you're going to say there's a free platform. What do free users get? Yeah. Good thing. Because our mission was to always build a free platform. And so we really kept true to our mission and give an amazing platform for free, which gives you 10 years of financial statements on 40,000 global securities. So we don't list you just to US securities. It's on global stocks. We give you a watch list, the screener, comparisons on competitors, fundamental charting up to 10 years, filings, transcripts. You can look at the press releases right inside the app, news, ETFs, funds, super investors, hedge fund letters, investor holdings, and financial calendars. Those are

all the features you'll get on the free tier. Now, on the middle tier, the personal tier, you're going to unlock up to 35 years of financials and just kind of like nice to have, like quality of life, like notifications being built in, price targets for building models, like business owner mode where you can hide prices, like kind of like just that next level for individual investors who want to level up. And then the top tier is for like investment teams and professionals who want to unlock that KPI data and request KPI coverage as well. Like a firm will be like, here, we want these 10 names in our coverage and in your coverage. And then you'll have basically our entire universe that we're looking at, which is great, right? Because like earning

season comes around and we have it updated within 15 minutes when Netflix comes out with their net subscriber ads, it's right there in one place, especially easy to handle around the peak of earning season. That matters a lot for these people. And so we have a premium tier for that as well. That's the three plans that are available today. And now a perfect time to shameless plug our code. If you use CCM, you get 15% off any of the paid plans, but I think that covers it pretty well. If you're interested, please go ahead and check out stratosphere.io. We'll have a link in the description as well. But thank you, Brayden, for joining us. Ryan, keep it up. I really like what you and Brett are doing and I'll be listening along. Don't you wish you could just hit skip on

the worst parts of your life? You know, the same way you can skip an ad. I get it. I'm Siaya and I live in Ice Cove. I've made some questionable decisions that didn't end up the way I planned and today I'm still figuring it out. Somehow things usually get worse before they get better. Apparently that's how I roll. So bundle up and come along for the bumpy ride. Stream a new episode of North of North Tuesdays on CBC Gem.