The company: Drew Industries Inc. in White Plains, New York, makes components for the manufactured home and recreational vehicle industries.
The Markets: Drew Industries has two main subsidiaries--Kinro Inc. and Shoals Supply Inc., both in Arlington, Texas. Kinro builds aluminum and vinyl windows for manufactured homes, and windows and doors for recreational vehicles. Shoals supplies manufactured home builders with products used to transport the homes, including axles, chassis parts and tires.
The Sizzle: Sales of manufactured homes have steadily risen over the past decade, taking market share away from site-built homes due to their lower price tags. One out of every four homes sold in the United States is manufactured, and industry statistics project a moderate increase in sales this year. The continuing trend in the industry toward multisection homes benefits Drew Industries, as manufactured homes accounted for 80 percent of Drew's revenues in fiscal 1996.
The Risks: Although in the early '90s growth in manufactured homes was explosive, it seems to have slowed over the past two years. RV sales have also been weak for a while, as the industry reached 259,200 units in 1994 but has since slipped.
Historical Financial Performance: Drew has shown strong growth in revenues, operating income and net earnings over the past five years, due in no small part to a very savvy acquisition strategy. Kinro has 10 factories with two under construction, and customers have given the company numerous awards of excellence in recognition of its superior customer service.
Although gross margins have been heading downward over the past two years, due mostly to the company's aggressive expansion in number of factories, operating margins have been increasing over the same time period due in part to aggressive cost controls. The impending completion of the company's two new factories should help it increase margins again next year.
Drew recently repurchased 800,000 shares of its common stock at $13 a share, below the company's trading price. This decrease of the outstanding shares by 15 percent is beneficial to future earnings per share. Even though Drew Industries typically trades with a price-earnings ratio of less than 13, the company has managed to more than double its stock price over the past three years.
Projected Financial Performance: Analyst estimates call for Drew to make $1.43 in earnings per share this fiscal year. This means if the company can trade with a P/E ratio of only 10 or 11, its shares would be priced at somewhere between $141|4 to $153|4 over the next few months. Since Drew Industries' earnings are increasing by more than 20 percent per year, a sustained 10 or 11 P/E ratio is entirely reasonable.
Another way to value the company is to look at its sales and relate them to the company's market capitalization. With $175.7 million in sales over the past year and a current market capitalization of $110.5 million, the company trades with a .63 price-sales ratio (a ratio of the company's market capitalization to its total sales over the past 12 months). Companies with profit margins like Drew's typically trade with P/S ratios much closer to 1.0, giving Drew strong value in the market.