Short Palm Harbor Homes

Kevin WuMcIntire Investment Institute

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McIntire Investment InstituteMarch 28th , 2005

Company Overview

• Vertically integrated operation: produce, market, and finance manufactured homes and modular homes

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– Discovery

– Nationwide

– CountryPlace

– BankSource

• Concentrated in Texas and Florida

Industry Overview

• Manufactured Housing

– Industry recovering from massive slump

– Slump caused by over-aggressive lending and resulting defaults

– Several lenders left market; unavailability

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– Several lenders left market; unavailability of financing

• Modular Housing

– Experiencing unprecedented growth

– Being adopted by elite architects

Manufactured Home TrendManufactured Home Shipments (US Census)

1997 1998 1999 2000 2001 2002 2003 2004

Shipped 354 373 348 250 193 169 131 131

Percent of Total 24% 23% 21% 17% 13% 11% 8% 8%

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Industry Overview

• Other factors

– Repossessions

• Reduce demand for new homes

• Proportional to defaults

• Interest Rates

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• Interest Rates

– Manufactured home loans 2%-3% higher than traditional mortgage

Competition

• Traditional on-site construction

• Champion

• Fleetwood

• Clayton (Berkshire Hathaway)

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• Clayton (Berkshire Hathaway)

• Returning to profitability

• Cut costs when Palm Harbor was expanding

Manufactured Housing

• Moving upscale in manufactured housing

– Units flat year over year

– Sales increased 7%, units down 1%

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• Competitors still concentrating on low cost housing

– Champion returning to profitability

Manufactured Housing

• Inventory increasing despite idling of plant in Texas

• Closed 12 retail stores

• Same store sales down

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• Same store sales down

– Q2: 27.3% in units, 22.5% in dollars

– Q3: 21.6% in units, 8.6% in dollars

Manufactured Housing

• Hurricanes have helped demand

• Significant demand in Florida for replacement homes

– Temporary spike in demand

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– Temporary spike in demand

• Texas still weak

Modular Homes

• Regular home built in chunks

• Being adopted in low density areas

• Prestigious architects (Time Magazine)

• Relying on modular homes sales to

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• Relying on modular homes sales to support company

– Increased to 19.7% of sales from 10.8%

• Popular in North Carolina and Florida as replacement homes

Modular Homes

• Count as real estate

• Eligible for mortgages

• Market exposed to same risks as traditional homes

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traditional homes

– Interest rates

Interest rates

• Effect of rising interest rates

– Manufacturers hope that rising interest rates will help manufactured home sales

– Test for correlation

• Mortgage rates vs. Manufactured home sales

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• Mortgage rates vs. Manufactured home sales

• Monthly data from 1971

• ρ = -0.12439

– John Diffendal BB&T Capital Markets:

Manufacturers looking for hope

Interest rates

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14

16

18

20

13

0

2

4

6

8

10

Apr-

71

Apr-

73

Apr-

75

Apr-

77

Apr-

79

Apr-

81

Apr-

83

Apr-

85

Apr-

87

Apr-

89

Apr-

91

Apr-

93

Apr-

95

Apr-

97

Apr-

99

Apr-

01

Apr-

03

Mortgage Rates

Manufactured Homes

CountryPlace Mortgages

• Chattel Mortgage (property loan)

• Need to securitize loan portfolio to continue operations

– Offering will be made when portfolio

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– Offering will be made when portfolio reaches $170M (2nd half calendar ‘05)

• S&P does not see recovery in manufactured housing ABS market

– Conseco, Oakwood bankrupted

– Palm Harbor forced to provide financing

– High delinquencies and loss rates remain

Debt Obligations

• Issued $75M in convertible notes in first quarter ’05

– 3.25%

– Each $1,000 in principal amount convertible to 38.5803 shares

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convertible to 38.5803 shares

– 11.2% dilution

Debt Obligations

• Broke covenant on Floor Plan Facility in Q2 (ended Sept. 24)

• Obtained waiver for Q3

• Management does not expect to be

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• Management does not expect to be in compliance by this quarter

• Renegotiating covenant for next quarter

Debt Obligations

• Current outstanding balance on Floor Plan Facility: $23.9M

• Cash:

Q2 ’05 Q3 ’05 Q4 ‘05

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Q2 ’05 Q3 ’05 Q4 ‘05

$67.6M $34.0 $24.6M

Other facts

• 54% of outstanding stock owned by

– Lee Posey (recently ill)

– Capital Southwest Corp.

• FY ’05 ended March 25th

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• FY ’05 ended March 25

What to look for?

• Overly optimistic?

• Q4 ’05 EPS estimate $(0.01) and $0.12

– Q3 ’05 EPS $(0.20)

– Q4 seasonally weakest

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– Q4 seasonally weakest

• Manufactured Home shipments to come down from anomalous jump

Risks

• Manufactured housing shipments continue January pace

• Modular housing continues to grow at its current rate

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its current rate

• ABS market improves and Palm Harbor is able to make offering profitably

Revenues & EPSRevenues/Earnings Data

Fiscal year ending Mar. 31

Revenues (Million $)

2005 2004 2003 2002 2001 2000

1Q 157.8 155.9 138.5 172.6 190.1 218.6

2Q 150.4 148.6 149.6 173.4 175.8 193.7

3Q 154.6 144.2 149 158.8 145.9 187.6

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3Q 154.6 144.2 149 158.8 145.9 187.6

4Q -- 129.8 136.1 122.7 137.8 177.6

Yr. -- 578.5 573.1 627.4 650.5 777.5

Earnings per Share ($)

2005 2004 2003 2002 2001 2000

1Q 0.05 0.04 -0.06 0.25 0.33 0.49

2Q -0.1 0.02 0.07 0.29 0.34 0.45

3Q -0.2 -0.18 0.12 0.23 0.14 0.41

4Q -- -0.14 0.01 0.08 0.15 0.31

Yr. -- -0.26 0.14 0.85 0.96 1.66

Ratios

PHHM CHB FLE

P/E (TTM) NM 53.24 NM

Price/Sales 0.63 0.59 0.18

Price/Book 1.49 8.92 2.07

Current Ratio NM 1.62 1.42

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Current Ratio NM 1.62 1.42

Debt to Equity 0 2.17 1.68

Gross Margin 25.33 17.07 18

Operating Margin -1.14 2.07 -0.19

ROA -1.71 2.99 -5.33

ROI -3.52 4.84 -8.4

ROE -3.54 26.37 -23.73