CAVCO INDUSTRIES INC (NASDAQ:CVCO) Fits Peter Lynch’s Growth at a Reasonable Price (GARP) Strategy

Peter Lynch’s investment strategy, described in One Up on Wall Street, centers on finding companies with steady growth at fair prices, commonly known as the Growth at a Reasonable Price (GARP) approach. His method highlights financial strength, earnings stability, and controlled debt, steering clear of overly hyped or rapidly expanding businesses that might falter. By looking for firms with solid earnings growth, healthy financials, and valuations that match their growth (using tools like the PEG ratio), investors can spot long-term opportunities that match Lynch’s ideas.

Cavco Industries Inc (NASDAQ:CVCO) stands out as a potential match for this strategy. The company, which produces factory-built homes and modular structures, works in a specialized yet vital part of the housing market. Its financials show the steady growth and stability Lynch preferred.

Why Cavco Industries Matches the Lynch Approach

1. Steady Earnings Growth

   • Lynch liked companies with consistent, moderate earnings growth—enough to build returns but not so fast as to be unstable. Cavco’s 5-year EPS growth of 21.77% is above Lynch’s 15% minimum but below his 30% warning level, showing the company has grown without overreaching.
   • Expected future EPS growth of 12.86% suggests a slower pace but still fits Lynch’s focus on reliability over risky, high-speed expansion.

2. Fair Valuation Compared to Growth (PEG Ratio)

   • The PEG ratio, which adjusts the P/E ratio for growth, is key to Lynch’s strategy. A PEG ≤ 1 means the stock may be undervalued relative to its growth. Cavco’s PEG of 0.92 meets this standard, indicating the market may not fully recognize its earnings potential.
   • Its P/E of 20.01 is a bit higher than the industry average, but the PEG shows the growth justifies the premium—a core Lynch principle.

3. Healthy Financials and Earnings Strength

   • Lynch avoided companies with heavy debt, preferring those with debt-to-equity ratios below 0.6 (ideally under 0.25). Cavco’s D/E ratio of 0.007 is very low, showing little dependence on debt.
   • Its current ratio of 3.00 and quick ratio of 2.17 confirm strong liquidity to cover short-term needs, another Lynch priority.
   • Return on equity (ROE) of 16.07% and ROIC of 14.55% show effective use of capital, outperforming many peers in the household durables sector.

4. Other Lynch-Aligned Traits

   • Insider Actions and Share Buybacks: Cavco has reduced shares outstanding over the past five years, a positive sign Lynch appreciated.
   • Industry Role: As a supplier of affordable housing, Cavco works in a “boring” but stable field—the kind of overlooked business Lynch often favored.

Financial Overview

Our full financial review rates Cavco a 7/10, with top marks in financial health (10/10) and earnings strength (7/10). The company’s margins, debt levels, and growth metrics rank it highly in its industry, while its valuation stays fair compared to its financial performance. Notably, Cavco’s Altman-Z score of 10.28 suggests almost no risk of bankruptcy, and its debt-to-FCF ratio of 0.05 highlights strong cash flow management.

Finding Similar Opportunities

Cavco is one of several stocks picked by our Peter Lynch-inspired screen. Investors searching for other GARP candidates can use this tool to filter for companies with steady growth, sound financials, and fair valuations.

Disclaimer: This article is not investment advice. Do your own research or consult a financial advisor before making investment decisions.