CAVCO INDUSTRIES INC (NASDAQ:CVCO) Meets Peter Lynch's GARP Investment Criteria

In the field of long-term investing, few strategies have shown the lasting success of Peter Lynch's method. The famous fund manager stressed finding companies with lasting growth paths trading at fair prices, a method often called Growth at a Reasonable Price (GARP). Lynch's system joins basic analysis with useful business assessment, concentrating on companies showing steady earnings growth, sound financial condition, and good valuation measures compared to their growth potential. This method steers clear of speculative high-priced stocks for businesses increasing at practical rates with firm basic foundations.

Meeting Lynch's Growth Standards

Cavco Industries Inc (NASDAQ:CVCO) shows several traits that match Lynch's investment thinking. The company's earnings per share have increased at a notable 21.77% each year over the last five years, easily passing Lynch's lowest limit of 15% while staying under his 30% cap for unstable growth. This steady record shows the company has set a history of profitable growth without the instability that often comes with very fast-growing companies. Lynch specifically looked for companies with this kind of reliable, practical growth that could be maintained over many business cycles instead of fast growth that often shows to be short-term.

Valuation Review

The Price-to-Earnings to Growth (PEG) ratio acts as a key part of Lynch's valuation system, and Cavco presents interesting numbers here:

• Current PEG ratio: 0.96
• Five-year EPS growth: 21.77%
• P/E ratio: 20.97

Lynch viewed companies with PEG ratios under 1.0 as possibly priced low relative to their growth outlook. Cavco's below-1.0 PEG ratio implies the market may not be completely valuing the company's growth path. This valuation measure was especially important to Lynch because it frames the price multiple by including the company's real growth performance, giving a more detailed picture than standard P/E analysis by itself.

Financial Condition and Earnings

Cavco displays sound financial numbers that would have interested Lynch's focus on company steadiness:

• Debt-to-Equity ratio: 0.007 (much lower than Lynch's chosen 0.25 limit)
• Current Ratio: 2.88 (much higher than the 1.0 lowest need)
• Return on Equity: 17.68% (passing the 15% standard)

The very small debt level gives large financial room and lowers risk during economic slowdowns, while the high current ratio shows enough cash to meet immediate responsibilities. The ROE number shows effective use of owner money, a main sign of management skill that Lynch stressed many times in his investment works.

Basic Analysis Summary

According to Chartmill's full basic analysis report, Cavco gets a total rating of 6 out of 10, with especially high scores in financial condition (9/10) and earnings (7/10). The company is notable within the Household Durables industry for its excellent balance sheet strength and steady earnings. While the valuation rating of 3/10 shows current market prices that may seem high compared to some industry equals, this must be viewed next to the company's better growth history and financial numbers.

The analysis points out Cavco's high return measures, including Return on Invested Capital of 16.15% that does better than 90% of industry rivals, and a notable Altman-Z score of 10.47 showing very low failure risk. The company has shown steady operational skill with positive cash flow in each of the past five years and growing profit margins. These traits fit well with Lynch's liking for financially safe companies with proven histories of performance.

Industry Place and Business Plan

Cavco works in the factory-built housing area, making residential modular structures sent through independent and company-owned sellers. The company's mixed brand list, including Cavco, Fleetwood, and Palm Harbor, gives market spread across several customer groups. This business plan represents the kind of "simple" industry that Lynch often liked, where competitive edges can be made over time without drawing too much Wall Street notice or guesswork.

The company's financial services part adds another income source while helping main operations through consumer financing and insurance services. This joined method makes extra hurdles for new entrants and customer loyalty, traits Lynch appreciated when judging business strength. The basic need for housing, joined with Cavco's focus on low-cost modular answers, places the company to gain from long-term population patterns despite economic changes.

For investors wanting to find more companies that meet Peter Lynch's strict standards, our pre-built screening tool gives often updated results based on the same method used to find Cavco Industries.

Disclaimer: This analysis is based on basic data and past performance numbers. It is not meant as investment guidance, nor does it make a suggestion to buy or sell any security. Investors should do their own research and think about their personal money situation before making investment choices. Past performance does not ensure future outcomes.