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    Sunday, July 06, 2003

    Well CVCO has traded much higher than I had hoped (I don't want to say expected as I'm not sure I had any basis for expectations).

    There were a few notable announcements this week that affect the manufactured housing business (and therefore my estimates of Intrinsic Value). These have been outlined by Orbis in an effort to discourage Clayton homes (CMH) sale to Berkshire Hathaway (BRKa). Orbis, a CMH shareholder, sent a letter to other CMH shareholders encouraging them not to sell at BRKa's bid. Some of the interesting points:

    1. The outlook for the manufactured housing industry is improving, coming off a cyclical trough

    2. The bottom of the cycle is the wrong time to be selling a great company in a highly cyclical industry. We believe in the long-term fundamentals of the manufactured housing industry and that Clayton is an outstanding company with a great future.

    3. U.S. Bancorp, the eighth-largest financial services company in the US, announced on June 27 that it would begin offering financing for manufactured housing. Commenting on this news, a leading industry analyst said: "Signs that new ... lender entrants are imminent should mute concern about weak expected near-term results and allow the market to look with renewed confidence toward a more prospective 2004 and 25%+ [industry] shipment growth."(2)

    4. In Texas, the largest market for manufactured housing, a new law became effective on June 18 reversing legislation which had severely depressed manufactured housing shipments.

    5. Indications are that the overhang of repossessed homes, which crowd out new shipments, will evaporate in 2004.(2)

    (2) BB&T Capital Markets report, 6/30/03

    Items 3 & 5 are incredibly significant and fundamentally change my likely valuation case for CVCO to the upside. I mentioned in my June 26 post that I believed lenders would start to return in the long term, I certainly didn’t imagine there would be an announcement within a week!

    CAVCO traded between 15 and 22.50 this week, closing at $20, down 7% off Wednesday’s close (Friday was July 4th). From what I can make out, about 620k shares have been traded.

    I wanted to know how many shares of CTX were held by S&P 500 funds to establish if the sell off is probably over or just beginning – don’t try this at home.

    I managed to dig it up after an hour or so. Rough math:
    1. S&P Press Release on total S&P 500 Assets for 2002 - 900bn in S&P 500 assets at end of ‘02

    2. S&P Growth since the end of 2002– almost 10% growth in S&P 500 this year

    3. CTX percentage weight in the S&P 500 market cap weighted index is 0.0527% – (this was horrible, I used the top 10 holdings off the Vanguard 500 website and calculated their total market cap - $2,139,122.29. Then I divided that by the 23.1% of the index that they represent. Result is that the total index is worth $9,260,269.65 bn. Centex Market cap is 4884.21 MM, divided by total market cap gives 0.0527%).

    End result – about 6.6M shares of CTX are held by S&P 500 index funds. That is 330,000 shares of CAVCO are held by S&P 500 index funds. Most of them will need to sell relatively soon. Given that 600k shares have already traded, about 20% of the company may have already changed hands. It is possible that the S&P funds are already out. I was hoping that the math would show that there was more selling to come, unfortunately not.

    If in fact most of the selling is over, then I am certainly curious as to who (probably a few have taken the majority) has taken this 20% stake in CAVCO. I’m going to watch it over the next week and see how it trades. Friday was a low volume day at only 100k shares, compared with 300 and 200k the days before. It is strange to see such a large drop in price on such low volume; if the funds were more or less done selling by Friday then the abating selling pressure should have driven prices up. I really can't make any conclusions based on funds flow here. I suspect I will be lucky to see sub $10 but I may try wait for $15. With these positive movements in the industry my $31 estimate only assumes 5% growth from these very depressed levels. A 50% discount to intrinsic value is certainly a wide enough margin of safety. Another interesting strategy may be to dollar cost average into CVCO over 4-8 weeks.

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    Disclaimer and Disclosure Analyses are prepared from sources and data believed to be reliable, but no representation is made as to their accuracy or completeness. I am not paid by covered companies. Strategies or ideas are presented for informational purposes and should not be used as a basis for any financial decisions.
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