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Michael Burry

Clayton Homes
NYSE:CMH
2000-2005
Industry: Manufactured Homes
Category: Cyclical/Best-of-Breed

Context
Clayton is a major player within manufactured housing, building homes, selling the home, lending to the buyer, and renting out homes.
20% of income is from manufacturing, 20% from selling, 8% from rental, and 52% from lending.

Why the Company was Mispriced
The manufactured housing industry is a troubled cyclical industry.
Players aggressively overexpand in the good times, creating a glut of inventory and ultimately a cyclical downturn.
Companies have borrowed debt to pay 20x earnings for retail operations (selling homes),
only to originating poor-quality loans using a "lend to anyone" approach,
boosting sales in the short-term but led to uncollectable loans.
This simply cannot be done in a cyclical industry.

Alternative View
Clayton is an excellent candidate as a best-of-breed in an out-of-favor industry.
Management is a keen underwriter, runs efficient operations, and in conservative in acquisitions/accounting.
For example, Clayton recently purchase 95m in loans. It scrubbed these loans, stratifying them for risk, shaking them down for repossessions, and re-issued them at a profit a year later.
Another example, Clayton built plants for 25% of the price others pay to buy, and achieves profitability on these plants in 2 months.
The company has bare executive offices and provide employees rewards individual profitability rather than volume production.
Now at the bottom of the downturn, Clayton stands to be one of the best-positioned players, with a pristine balance sheet, and the best mangement in the industry.
It has had record results 65 of the 66 quarters as a public company and a loan delinquency rate of only 1.65%.
Amidst bankruptcy and general malaise, Clayton can take it's efficient operations and go shopping/take market share.
The shares are trading 8x earnings and has a ROE >15%.

Result
Clayton's share price was $8/sh in August 2000.
It dropped to $5.75/sh in Aug 2001, $5.3/sh in Aug 2002, $8.6 in Aug 2003, $19 in Aug 2004, and $28 in Aug 2005.
Although Burry's sell price is unknown, the 5-year CAGR is 30%.