Ignore Fleetwood's Siren call
Recommendation
When Odysseus sailed past the Sirens, his crew were able to resist their call by filling their ears with wax while their leader tortured himself, listening to their singing while tied to the mast.
When looking at Fleetwood Corporation we recommend you employ the financial equivalent of wax in the ears—a healthy dose of scepticism—so as not to be lured in.
So, are you ready for this? Okay. Fleetwood’s many charms include a director owning 11%, no-nonsense annual reports, operating margins above 15%, returns on capital above 30%, healthy cash flow, net cash on the balance sheet, 10-year growth in earnings per share of 13%, long-term government contracts, a price to earnings ratio of 10.4 and a dividend yield of almost 8.1%.
Key Points
- On the surface Fleetwood has many attractions
- We’re concerned its numbers have been flattered by the mining boom
- In the absence of a sustainable edge we recommend you steer clear
Too good to be true
It all looks too good to be true and, sadly, we think it is – or at least it may well be, which is near enough to an extreme sceptic.
Fleetwood has two divisions, one making recreational vehicles (caravans and the like) and the other making manufactured accommodation – temporary and semi-permanent buildings for all manner of uses: classrooms, retirement parks and, most particularly, accommodation for engineers and other workers on large resource projects.
Getting on for 10 years ago, for example, the company built Searipple, a ‘village’ housing up to 1500 people in Karratha, Western Australia. Fleetwood has kept ownership of Searipple and manages the property. Until recently Woodside Petroleum used it to house workers on its North West Shelf expansion and Pluto projects but recent demand has been patchy, with current occupancy at around 50%.
Right now, Fleetwood is building two new villages, the Gladstone Village near Gladstone in Queensland and the Osprey Village near Port Hedland in Western Australia. Both villages will be managed by Fleetwood and accommodation will initially be leased by governments or government agencies for key workers. The Osprey Village will even provide a guaranteed return (albeit of an unspecified amount) from the WA Department of Housing for 15 years.
But over on the other side of Karratha, MAC Services has a village of 208 homes at Gap Ridge, and there are other villages in and around Gladstone and Port Hedland. And it's only taking a year or two to put Osprey and Gladstone together so other villages could appear quickly.
High fixed cost businesses
We suspect it may simply be that for the past 10 years, increasing demand from resources projects has kept just ahead of supply. This could have flattered Fleetwood’s numbers for that entire period.
If demand from the resources industry started expanding again—at a more leisurely rate—we don’t think it would be long before more supply sprung up, and any subsequent slowdown could be very damaging.
If China fell off the proverbial cliff and the resources activity dropped dramatically, things could quickly look very ugly indeed. These are high fixed cost businesses – as shown by the sharp fall in profits in the recreational vehicles division (which we assume has similar manufacturing dynamics to manufactured accommodation) for reasons as prosaic as the high Aussie dollar and weak sentiment among retirees.
The human desire to make a buck is deeply entrenched and companies don’t go on making more than their fair share without a good reason. If you know of a sustainable competitive advantage for Fleetwood, we’d love to hear about it in the comments section below. But in the absence of that, the water round here is too shallow for us. AVOID.