FLEETWOOD CORPORATION LTD (FWD) is a well-established Australian company that is currently operating in three of the country’s fastest growing sectors: recreation, resources and retirement.
The recreation and retirement sectors are being given a boost by the estimated 4 million baby boomers that are retiring over the next few years, spending increasing amounts of money on leisure activities and retirement accommodation.
However it is the “resources development” part of the business that has been responsible for most of the company’s growth over the past decade. It has provided thousands of temporary accommodation units to mining sites around the country and recently announced two big tender wins to build, own and operate workforce accommodation villages in Gladstone and Osprey (South Hedland).
These projects provide a solid platform for reasonable earnings growth in the medium to long term. However, the general sell off in the resources sector recently has seen the share price drop sharply and we think this represents an excellent buying opportunity.
Despite the large number of people entering retirement and the strong long-term trend this represents, the poorly performing stock market has hit consumer sentiment in the retiree sector and this has been reflected in weaker sales in its recreational vehicle/caravan division.
However, it is expected that this will pick up as lower interest rates boost the economy and lift consumer sentiment. The company is also tackling these headwinds by developing vehicles at lower price points to increase the potential market size.
But there are other reasons that make FWD stand out. Firstly, it has achieved an outstanding return on equity averaging 36.7 per cent over the past five years, indicating how successful the management has been in investing its profits – this is a key metric to use when assessing long-term success.
The board also own a significant stake in the company (17%), which means the bosses’ interests are closely aligned with other shareholders – always a good sign.
Thirdly the company has no debt, and a net cash position of $16.5m; its recent results showed profits up 4 per cent to $53.2m. Margins also improved over the year from 16.2 per cent to 18.8 per cent.
On our calculations the company needs to achieve a return on equity of 31.2 per cent to justify its current market price (compared to a forecast return of 34 per cent). All the signs are that this required return will be exceeded. Hence our valuation at some 11 per cent higher than the market is currently signalling.
On this basis FWD will make a good addition to a balanced portfolio and should provide healthy capital growth in addition to fully franked dividends in excess of 6.5 per cent.
Company: Fleetwood (FWD)
Current price: $10.21 (Oct 15)
Forecast value: $11.77 and above ++
Potential upside: 15.2%
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Investors should not rely on this information alone and should seek independent financial advice from a qualified expert before considering any share market investment.
++Fair or forecast value is the price placed on the share after calculating a range of factors including profitability, assets, debt and, most importantly, Return on Equity – the same measure used by Warren Buffett to assess long-term value.
Shares are assessed by Clime Asset Management to calculate which companies are undervalued or over-valued based on their return on equity. History has shown that the most successful companies are those that produce the highest returns per dollar of shareholders' equity, yet this is not typically how shares are valued. This system highlights shares that are undervalued on this key measure. Shares are expected to reach this value in 3-5 years, as price tends to follow value in time.
Information is intended as a guide only. For specific advice contact your financial services professional.