Legacy Housing's (LEGH) ROCE Trend: A Cause for Concern?

Legacy Housing Corporation (NASDAQ:LEGH) has been a prominent player in the manufactured housing industry, but recent trends in its return on capital employed (ROCE) may give investors pause. While the company's ROCE has remained relatively stable at around 12% over the past five years, this consistency may not be indicative of a strong underlying business model. In this article, we will explore the factors contributing to Legacy Housing's ROCE stability, compare its capital employed growth with industry peers, and discuss the primary reinvestment opportunities driving the company's earnings growth.



1. Factors contributing to Legacy Housing's ROCE stability

Legacy Housing's ROCE has remained stable at around 12% over the past five years, primarily due to two key factors:

1. Consistent reinvestment of capital: Legacy Housing has reinvested capital at a steady rate, with the amount of capital employed increasing by 114% over the past five years. This consistent reinvestment has allowed the company to maintain its ROCE by generating returns on the additional capital invested.
2. Adequate returns on reinvested capital: Legacy Housing has been able to generate a return of 12% on the capital it has reinvested. This return is considered decent and is somewhat close to the Consumer Durables industry average of 14%. The company's ability to generate adequate returns on its reinvested capital has contributed to the stability of its ROCE over the past five years.

While these factors have allowed Legacy Housing to maintain a consistent ROCE, it is essential to consider other aspects of the company's financial health and the broader market conditions.

2. Legacy Housing's capital employed growth compared to industry peers

Legacy Housing's capital employed growth over the past five years has been significant, with an increase of 114%. However, it is crucial to compare this growth with the industry average to better understand its significance.

According to the provided data, Legacy Housing's capital employed growth is higher than the industry average. The Consumer Durables industry, which Legacy Housing is a part of, has an average capital employed growth rate of 10% over the same period. This indicates that Legacy Housing has been more aggressive in expanding its capital employed compared to its industry peers.



3. Primary reinvestment opportunities for Legacy Housing

Based on the provided information, Legacy Housing Corporation (LEGH) has several primary reinvestment opportunities that drive earnings growth. These opportunities are reflected in the company's consistent return on capital employed (ROCE) and its ability to reinvest capital at good rates. Here are some key points supporting this analysis:

1. Consistent ROCE: Legacy Housing has maintained a consistent ROCE of 12% over the past five years. This indicates that the company has been effectively reinvesting capital to generate profits. The formula for ROCE is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
For Legacy Housing, this calculation is:
0.12 = US$58m ÷ (US$521m - US$32m) (Based on the trailing twelve months to September 2024)
2. Capital employed growth: Over the past five years, Legacy Housing has increased its capital employed by 114%. This growth in capital has been reinvested at a consistent rate of return, contributing to the company's earnings growth.
3. Earnings growth: The company's earnings have grown significantly, driven by its reinvestment strategy. This growth is reflected in the company's financial statements, with net income from continuing operations increasing to US$158.03 million in the most recent quarter (as of September 30, 2024).
4. Investment in business: Legacy Housing does not pay any regular dividends, meaning that all of its profits are being reinvested in the business. This strategy has contributed to the company's earnings growth and its ability to maintain a consistent ROCE.

In conclusion, Legacy Housing's primary reinvestment opportunities lie in its ability to effectively reinvest capital at a consistent rate of return, grow its capital employed, and invest all of its profits back into the business. These factors have driven the company's earnings growth and contributed to its overall success in the manufactured housing industry. However, investors should remain cautious and consider other factors, such as market conditions and the company's financial health, before making investment decisions.