Executive Summary / Key Takeaways

• Resilient Growth and Profitability: Cavco Industries (CVCO) has demonstrated robust financial performance, with net revenue increasing 9.7% year-over-year in Q2 FY26 and operating profit up 27%, driven by strong execution in both its Factory-Built Housing and Financial Services segments.
• Strategic Expansion and Integration: The recent acquisition of American Homestar Corporation, adding two manufacturing facilities and nineteen retail locations, significantly strengthens Cavco's market position in the South Central U.S. and is expected to yield substantial cost reduction and optimization benefits.
• Technological and Operational Edge: Cavco's continuous investment in plant modernizations, digital marketing transformation, and a cohesive rebranding strategy enhances efficiency, improves lead generation, and positions the company for sustained market share gains in the evolving housing landscape.
• Financial Services Turnaround: The Financial Services segment, particularly the insurance operation, has seen a significant turnaround, achieving its best quarterly profit in four years in Q3 FY25 due to aggressive underwriting changes, premium increases, and improved claims management, contributing meaningfully to consolidated profitability.
• Affordability as a Core Driver: As affordability becomes a paramount concern in the housing market, Cavco's factory-built homes offer a compelling solution, appealing to growing demographics and benefiting from regulatory efforts to streamline the industry and expand market access.

Building a Foundation for Growth: Cavco's Strategic Blueprint in Affordable Housing

Cavco Industries, Inc. (NASDAQ:CVCO), established in 1965, has evolved into a leading designer, producer, and retailer of factory-built homes, including manufactured and modular units, park model RVs, vacation cabins, and commercial structures. Headquartered in Phoenix, Arizona, Cavco's overarching strategy centers on providing affordable housing solutions through a vertically integrated model, complemented by robust financial services. This strategic approach positions the company to capitalize on the persistent demand for accessible housing in the United States.

The company's historical journey, marked by strategic acquisitions like Fleetwood in 2009, has expanded its manufacturing footprint and technological capabilities. By September 27, 2025, Cavco operated 31 homebuilding production lines across the U.S. and two internationally, supported by a network of 79 company-owned retail stores. This extensive network, particularly with 46 stores in Texas, underscores its strong regional presence. The recent acquisition of American Homestar Corporation, completed after Q2 FY26 for $190 million, further bolsters this footprint, adding two manufacturing facilities and nineteen retail locations, and strengthening Cavco's position in the South Central U.S.. This expansion brings Cavco's total plant count to 33 and retail stores to approximately 100, enhancing its capacity and market reach.

Cavco's strategic initiatives are deeply rooted in technological differentiation and operational innovation. The company has consistently invested in modernizing its plants, incorporating advanced manufacturing technologies such as lasers, floor gantry systems for fastening, and CDC machines. These investments, typically ranging from $2 million to $5 million per plant, are not merely about increasing capacity but also deliver "very good safety and quality improvement aspects". This focus on advanced manufacturing allows Cavco to produce homes more efficiently, with enhanced quality and safety, providing a tangible competitive advantage in cost control and product reliability.

Beyond the factory floor, Cavco has undertaken a "complete transformation of our digital marketing architecture" over the past two years. This initiative, coupled with a comprehensive rebranding effort in Q4 FY25, aims to streamline the home search process for prospective buyers and improve lead generation for its retail partners. By aligning product lines with home characteristics rather than legacy factory brands, Cavco enhances the customer experience and optimizes its sales funnel. This digital-first approach, including providing dealers with integrated microsites, is proving to be a "significant value add for our partners", driving increased traffic and lead generation.

In the broader industry, manufactured housing offers a crucial solution to the housing crisis, characterized by a lower average price per square foot compared to site-built homes and competitive ownership costs. The two largest consumer demographics for manufactured housing—young adults and those aged 55 and older—are both experiencing growth, creating a sustained demand tailwind for Cavco's products. The company's focus on building quality, energy-efficient homes, including green building initiatives and designs for alternative energy sources like solar, further aligns with evolving consumer preferences and regulatory pushes for sustainability.

Competitive Positioning and Market Dynamics

Cavco operates in a competitive landscape that includes other large manufactured housing producers like Skyline Champion Corp. (SKY) and Berkshire Hathaway Inc. (BRK.B) (via its Clayton Homes subsidiary), as well as traditional homebuilders like NVR Inc. (NVR) that also engage in modular construction. Cavco distinguishes itself through its diversified brand portfolio, integrated financial services, and a strong network of company-owned retail stores and independent distributors. This integrated ecosystem, offering a one-stop solution for buyers, fosters stronger customer relationships and provides a qualitative edge in bundled services.

Compared to Skyline Champion, Cavco's comprehensive financial services and diversified product offerings, including factory-built commercial structures, provide a broader value proposition. While Skyline Champion is known for its cost-efficient manufacturing and streamlined production, Cavco's strategic investments in plant modernization and digital marketing aim to close any efficiency gaps while enhancing customer engagement. Skyline Champion's P/E ratio of 18.0 and P/B ratio of 2.40 suggest a valuation that reflects its focused housing production.

Against the dominant scale of Berkshire Hathaway's Clayton Homes, Cavco positions itself as a more agile and specialized player. While BRK.B benefits from vast resources and market dominance, Cavco's strategy of targeted retail expansion and product innovation allows it to maintain flexibility in niche markets. Berkshire Hathaway's P/E ratio of 15.65 and P/B ratio of 1.50 reflect its diversified conglomerate structure and strong asset base.

NVR, a significant player in both conventional and modular homebuilding, competes with Cavco in residential construction. Cavco's specialization in affordable, factory-built housing offers a distinct advantage in speed of delivery and cost-effectiveness, appealing to a different customer segment than NVR's broader homebuilding focus. NVR's P/E ratio of 14.3 and P/B ratio of 5.21, along with a PEG ratio of 0.73, indicate a company with strong expected earnings growth relative to its P/E.

Cavco's competitive advantages are further bolstered by its national sales team, which has improved selling approaches to communities and developers, addressing a previous gap in its organizational structure. This, combined with product innovation, allows Cavco to effectively gain market share, as evidenced by its outperformance relative to national HUD code shipments.

Financial Performance and Operational Excellence

Cavco has demonstrated impressive financial and operational performance, particularly in recent quarters. For the second fiscal quarter ended September 27, 2025, net revenue reached $556.5 million, marking a 9.7% increase year-over-year. Operating profit surged by approximately 27% over the prior year's Q2, and 3% sequentially, with contributions from both segments.

The Factory-Built Housing segment was a primary driver, with net revenue increasing 10.0% to $535.1 million for the three months ended September 27, 2025. This growth was fueled by a 5.4% increase in homes sold and a 4.4% rise in average revenue per home sold. The increase in average selling price (ASP) was notably influenced by a higher proportion of sales through company-owned retail stores and a favorable mix shift towards multi-section homes, alongside product pricing increases. Factory utilization in Q2 FY26 stood at approximately 75%, up from 70% in the prior year.

Gross profit for the Factory-Built Housing segment remained flat at 22.9% of net revenue in Q2 FY26, reflecting the company's ability to manage costs despite market dynamics. Management noted that while tariff risks are a concern, lumber costs remained "pretty low" in Q2 FY26, contributing to the healthy gross margin.

The Financial Services segment showcased a remarkable turnaround. For the three months ended September 27, 2025, net revenue increased 1.4% to $21.4 million, primarily due to higher insurance premiums. More significantly, gross profit for the segment soared by 158.9% year-over-year to $11.9 million, with gross profit as a percentage of net revenue reaching 55.6%. This dramatic improvement was attributed to "aggressive actions taken to pair unprofitable policies and changes that were made to underwriting and claims management," alongside fewer claims from severe weather events. Management emphasized that "the majority of the increased profitability has resulted from aggressive actions", indicating a sustainable improvement beyond just favorable weather.

Consolidated gross profit as a percentage of revenue improved by 130 basis points year-over-year to 24.2% in Q2 FY26. Selling, general and administrative (SG&A) expenses increased, partly due to higher incentive compensation and deal costs related to the American Homestar acquisition. The effective income tax rate for Q2 FY26 was 22.1%, up from 20.3% in the prior year, mainly due to a reduction in expected tax credits.

Cavco's liquidity remains robust. As of September 27, 2025, cash and cash equivalents totaled $374.978 million. The company maintains a $75 million revolving credit facility, with no outstanding borrowings, and the capacity to increase it by an additional $75 million. This strong balance sheet and cash generation support Cavco's capital allocation priorities, which include enhancing plant facilities, pursuing strategic acquisitions, assessing lending opportunities, and executing share repurchases. The company repurchased $36 million of common shares in Q2 FY26, with $142 million remaining under authorization.

Outlook and Strategic Momentum

Cavco's outlook is characterized by a proactive approach to market opportunities and a commitment to operational flexibility. Management anticipates continued market improvement, particularly as channel inventory issues are largely behind them and demand for affordable housing persists. The company's aggregate backlog of 5 to 7 weeks as of Q2 FY26, with unit backlog slightly up quarter-to-quarter, provides a solid foundation for future production.

The integration of American Homestar Corporation is progressing "quickly and very well", with expectations of "significant cost reduction as well as product and retail optimization benefits". This acquisition will further enhance Cavco's retail integration, as American Homestar historically sold approximately 60% of its manufactured homes through company-owned stores.

Cavco's technological roadmap includes ongoing plant modernizations, which are "high-return investments" that not only increase throughput but also improve safety and quality. The digital marketing transformation and rebranding efforts are expected to continue driving lead generation and enhancing the customer experience, positioning Cavco for sustained market share gains.

Management is actively engaged in advocating for regulatory changes that could unlock significant growth opportunities for the industry. Efforts to clarify HUD as the sole regulator for manufactured housing and to remove the chassis from the federal definition of a manufactured home are seen as crucial. Removing the chassis, for instance, could "open up a lot of innovation", enabling the development of multi-story homes and facilitating penetration into "urban and suburban markets". These legislative changes, if enacted, could significantly expand the addressable market for factory-built housing.

Risks and Challenges

Despite a positive outlook, Cavco faces several pertinent risks. Regional market disparities, such as the slowdown observed in the Southeast (shipments down 4% year-to-date and 10% in July/August compared to last year), require continuous monitoring and production adjustments. While management believes the market in the Southeast is currently "in balance", sustained weakness could impact future performance.

Tariffs on key building materials and components present an ongoing challenge. Canadian lumber countervailing duties increased from 14.5% to 35% at the end of July 2025, with an additional 10% tariff announced in October 2025. While a delay in China tariff increases might mitigate some impact on electrical and plumbing components, the overall effect of tariffs could lead to "meaningful impact on the cost of our homes". Cavco's ability to pass these cost increases through pricing will be "very dependent upon local market conditions".

The lack of an efficient secondary market for manufactured home-only loans and the limited number of institutions providing such loans continue to constrain industry growth and result in higher borrowing costs for consumers. While Cavco is willing to hold some loans on its balance sheet to support sales, its long-term strategy is to "originate and sell", highlighting the need for a more robust secondary market.

Conclusion

Cavco Industries stands as a compelling investment in the affordable housing sector, demonstrating a powerful blend of operational agility, strategic expansion, and a commitment to technological advancement. The company's recent financial performance, marked by strong revenue growth and a significant turnaround in its Financial Services segment, underscores the effectiveness of its management strategies. Through continuous investment in plant modernization, a sophisticated digital marketing platform, and a cohesive rebranding effort, Cavco is enhancing its competitive moat and driving market share gains.

The strategic acquisition of American Homestar Corporation further solidifies Cavco's market presence and capacity, while ongoing advocacy for favorable regulatory changes promises to unlock new avenues for innovation and market expansion. Despite facing challenges such as regional market fluctuations and tariff pressures, Cavco's proactive management, strong balance sheet, and focus on affordability position it to capitalize on the enduring demand for accessible housing. The company's ability to adapt to changing market conditions and leverage its integrated business model makes it a resilient and attractive player in the residential construction industry.