Thursday, August 17, 2006

Berkshire Buys Southern Energy Homes

We have commented in the past on Buffett’s interest in manufactured homes. In fact at the most recent annual meeting, Buffett had very strong positive commentary regarding Clayton Homes, Berkshire’s manufactured homes subsidiary. Berkshire, back in 2003, purchased Clayton Homes for $1.7 billion, for what in retrospect seems like a bargain price. In fact, at the time of the purchase, there was some controversy about whether there might be a follow-up bid by some other bidder.

Clayton Homes, in my view, even prior to Berkshire’s involvement, has been the class act of the industry with its conservative financing and fully integrated approach. Clayton has 36 manufacturing plants and about 450 of its own stores, plus a network of some 1400 independent dealers. It operates 71 manufactured housing communities and is completely integrated in offering financial, insurance, and mortgage services to its customers.

Yesterday, Clayton acquired Southern Energy Homes(SEHI.PK) a small manufactured homes builder based in Alabama. Southern Energy Homes, having a very small shareholder constituency, reduced its SEC filing costs by going Pink Sheet rather than full SEC registration. The company, which like most of the industry in 2001 had been over-leveraged, but has steadily improved to the point that last year, the company had no long term debt or bank debt. Sales last year were about $200 million, rising 27% over 2004’s results. Net income was $9 million.

Things have continued to improve this year. Revenues at SEHI were $144 versus last year’s $88 million. Net income was $7.1million versus $2.7 million.In the first half of this year, the company has generated $17 million in CFFO and spent about $1 million in capex for free cash flow of $16 million.

The company held about 3.5% share of the manufactured housing industry.It manufactures out of five facilities, four in Alabama, and one in Texas.It sells to about 200 independent dealers.

Total industry shipments last year were about 147,000 units. This was the first upturn in shipments since 1998, the last peak in manufactured homes which was 373,000 homes.

For further background on the industry, please see two prior posts:

Trading Down in the Housing Cycle

Berkshire on Manufactured Housing

Disclaimer: I, my family, and some clients have a current position in Berkshire Hathaway. None have a current position in any other security mentioned in this post.


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