After dropping to their lowest level in two years following the Federal Reserve's September rate cut announcement, 30-year fixed-rate mortgages have climbed higher once again. Nonetheless, the environment is looking more favorable for homebuilding companies, as buyers are incentivized to make offers, and companies are better able to access loans to fund development projects and growth.

The top homebuilder stocks include major operations like D.R. Horton Inc. (NYSE: DHI) and Lennar Corp. (NYSE: LEN), each of which closes tens of thousands of homes per year and has a market capitalization of around $50 billion or more. With interest rates expected to continue to fall in future FOMC meetings over the coming months, there may be more space in the competitive homebuilding market for smaller players as well. Cavco Industries Inc. (NASDAQ: CVCO) is one such small homebuilding stock that nonetheless warrants investor attention.

Manufactured Home Builder Ready to Address Housing Crisis

Cavco is a mid-cap firm that manufactures pre-fabricated homes and other buildings as well as RVs. It also provides financing for customers through a financial services division. Given the significant need for affordable housing throughout the U.S.—there is a shortage of an estimated 7.3 million rental homes for renters with extremely low incomes. For example—Cavco is a company that could be advantageously positioned to address this problem within the broader real estate sector.

The firm is seeing this demand reflected in its sales volume, capacity utilization, and other key metrics. For the first quarter of the 2025 fiscal year, ended late June 2024, Cavco reported 20% sequential improvement to home sales volume and capacity utilization of 65% as compared with 60% in the prior quarter. Order increases of about 25% sequentially have contributed to a backlog of $232 million by the end of the quarter, up from $191 million three months earlier.

In October, the U.S. Department of Housing and Urban Development (HUD) announced sweeping changes to its Manufactured Home Construction and Safety Standards, including allowing immediate construction of duplex, triplex and quadplex manufactured homes nationwide. Cavco is well-positioned to capitalize on this shift with new development projects immediately.

Looking at Cavco's Fundamentals

Cavco's fundamentals are a bit more mixed, as it maintains a forward P/E ratio of 25.1, comparably high relative to the rest of the industry. It also experienced a 310-basis-point consolidated gross margin decrease, year-over-year, to 21.7% in the first fiscal quarter, the result of lower average selling prices and weather events which led to losses in its financial services segment. Expenses also increased by more than 5% to $64.9 million for the quarter as a result of acquisition costs and other factors.

On the other hand, net revenue improved by about half a percent to $477.6 million, an important reversal after the prior quarter's 11.8% year-over-year decline in this area. The company's cash balance of over $359 million marks an improvement of $6.6 million relative to a year earlier, another strong sign as the firm prepares for a rush in affordable housing manufacturing.

Investors may be wondering if, after a run of 62.4% growth in the last year, Cavco shares still have room to climb. Based on analyst predictions, the firm has a consensus price target of $438.50, representing just under 1% of upside potential. At the same time, analysts expect earnings growth to continue as the company solidifies its upward movement in this area.

Comparing Cavco to Other Homebuilders

Taking D.R. Horton and Lennar as comparison points, Cavco may be relatively overvalued. These other firms have forward P/E ratios of 13.3 and 12.7, respectively. However, both firms have already experienced skyrocketing share prices in the last year, with returns of 83.4% for D.R. Horton and 73.7% for Lennar during that time. This may be part of the reason analysts have set price targets below current levels for both of these firms.

Cavco's specialization in low-cost, factory-built homes could give it an edge if the push to create new affordable housing options across the country continues. Though some of its fundamental metrics may give investors pause, it also has a strong position to benefit compared to other homebuilders.