Cavco Industries Inc (NASDAQ:CVCO): A Peter Lynch-Style GARP Investment

Cavco Industries Inc (NASDAQ:CVCO) has become an interesting option for investors looking for long-term growth at sensible prices, based on a screening method drawn from Peter Lynch's investment philosophy. The famous fund manager's strategy centers on finding companies with maintainable earnings growth, sound financial condition, and sensible valuations, characteristics that describe what modern investors know as Growth at a Reasonable Price (GARP) investing. Lynch stressed locating businesses expanding at a consistent, manageable rate instead of pursuing explosive but possibly unstable growth, while also making sure these companies are not priced too high compared to their growth potential.

Meeting Lynch's Growth Criteria

The manufactured housing producer displays several traits that fit with Lynch's method, especially in its earnings growth path and valuation measures. Lynch specifically looked for companies with earnings per share growth between 15% and 30% each year, believing this range showed maintainable enlargement without the instability of hyper-growth companies.

• EPS Growth (5-Year): 21.77% - easily within Lynch's chosen 15-30% range
• PEG Ratio: 0.96 - under Lynch's limit of 1.0, showing sensible valuation relative to growth
• Return on Equity: 17.68% - surpasses Lynch's 15% minimum need for profitability

These measures together create an image of a company expanding at what Lynch would call a "just right" speed, not so slow as to be inactive, but not so fast as to be unstable. The below-1 PEG ratio is especially important in Lynch's structure, as it implies the market has not overvalued the company's growth potential.

Financial Health and Stability

Lynch put significant focus on financial strength, favoring companies with very little debt and strong balance sheets that could endure economic declines. Cavco's financial condition measures surpass even Lynch's conservative benchmarks.

• Debt-to-Equity Ratio: 0.007 - substantially under Lynch's preferred maximum of 0.6
• Current Ratio: 2.88 - shows strong short-term liquidity, much higher than the 1.0 limit
• Altman-Z Score: 10.83 - indicates very low bankruptcy risk

The extremely low debt level is notable, as Lynch often preferred companies that could expand without high leverage. This conservative financial setup gives Cavco important adaptability to handle industry cycles and keep putting money into growth projects.

Fundamental Assessment Overview

According to ChartMill's detailed fundamental analysis, Cavco Industries gets a score of 7 out of 10 overall, with especially good performances in profitability and financial condition. The company's profitability rating of 7/10 mirrors very good returns on assets (13.26%), equity (17.68%), and invested capital (16.15%), all placing in the top group of the household durables industry. Margins have displayed improvement in recent years, with operating margin getting to 10.60%.

The health score of 9/10 highlights the company's sound financial position, with excellent solvency measures and strong liquidity. The valuation score of 3/10 shows the stock trades at high multiples compared to industry peers, though this is partly explained by the company's growth path and profitability. Growth measures remain good with a 7/10 rating, featuring strong past revenue and earnings enlargement, though future growth projections display some slowing from past unusual levels. Detailed fundamental analysis gives more understanding of these ratings.

Investment Considerations

For investors following Lynch's ideas, Cavco stands for the kind of "dull" company the celebrated investor often preferred, working in the essential manufactured housing sector rather than following trendy, high-profile businesses. The company's concentration on factory-built housing, park model RVs, and commercial structures serves basic housing needs, fitting with Lynch's liking for understandable business models.

While Lynch would warn against paying too much for any company, Cavco's PEG ratio under 1 implies the current valuation could be sensible given the company's growth profile and financial strength. The mix of steady growth, unusual financial condition, and sensible valuation relative to growth possibilities makes Cavco worth thinking about for GARP-focused portfolios.

Discover More Investment Candidates

Cavco Industries stands for just one of the companies found through the Peter Lynch screening method. Investors curious about researching more companies that match these disciplined growth and value standards can access the complete screening results for more research chances.

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Disclaimer: This article presents objective analysis based on publicly available data and established investment methodologies. It does not constitute investment advice, a recommendation to buy or sell any security, or a guarantee of future performance. Investors should conduct their own research and consult with financial advisors before making investment decisions.