1 Factory Built Housing Stock on a Tear

Skyline Sales Up 8.9%

In the most recent quarter, Skyline Champion’s net sales rose 8.9 percent year-over-year to $582.3 million. This jump in revenue came despite a 1.4 percent reduction in the number of US homes sold, reflecting higher sales prices for each home. The price per home increased 13.5 percent to an average of $94,500.

In addition to strong revenue performance, Skyline Champion turned in exceptional earnings performance throughout 2022. In the most recent quarter, the company’s net income increased 22.5 percent year-over-year to total $82.8 million. Similarly, EPS rose 22 percent.

Skyline Champion’s near-term earnings growth, however, is expected to be strongly negative. The company’s EPS is projected to shrink by more than 35 percent over the coming 12 months.

Under other circumstances, such a massive earnings drop would be disastrous for most companies. It’s important to remember, however, that current earnings reflect the red-hot housing market that defined much of 2021 and 2022. As such, it’s quite natural for Skyline’s earnings to return to a more sustainable level as the housing market gradually slows.

The good news for Skyline Champion is that it maintains strong profitability metrics. Gross profit margin in the last quarter was 29.9 percent, and the company’s net margin is 15.6 percent.

Skyline’s return on invested capital is roughly 42 percent, and its return on assets is slightly above 30 percent. Taken as a whole, these metrics paint the picture of a company that is deploying its capital effectively and generating respectable profits for shareholders.

How High Will Skyline Champion Go?

Even after the massive price increase Skyline has seen this year, the stock may still have some room left to run. The median target price from six analyst forecasts is $77, a 13.2 percent increase from the most recent price of $68.02.

Opinions on the stock are mixed, with three of the covering analysts rating the stock as a buy and the other three rating it a hold. Based on a discounted cash flow analysis, the stock appears to have a fair value of about $75.

Skyline also still appears to be trading at reasonable multiples to both earnings and sales. The stock’s P/E ratio is 10.06, while the price-to-sales ratio is 1.4. The price-to-cash-flow ratio is somewhat higher at 14.28, but this is still far from excessive.

Encouragingly, Skyline Champion carries virtually no long-term debt. This will likely give the company a competitive advantage as interest rates continue to rise.

Home Sales Down, What It Means For Skyline?

As of February, median home prices declined year-over-year for the first time since 2012. Lower prices and slower sales could put more stress than expected on housing companies, especially if inflation and higher interest rates continue.

Skyline Champion has also seen its backlog drop substantially over the last year, an indicator of slowing market demand. The company’s backlog fell by nearly 35 percent in the most recent quarter compared to the previous year.

Given that earnings are already expected to shrink by a roughly similar amount, this backlog clearing isn’t a massive surprise for investors. It does, however, demonstrate just how large a slowdown Skyline Champion could see in the year ahead.

A final concern for shareholders is the fact that Skyline Champion is a relatively young business operating in a cyclical market. The company was founded in 2010, shortly after the housing market collapse that accompanied the 2008 financial crisis.

For the vast majority of its history, Skyline has done business in a housing market defined by rising prices and strong consumer demand. The housing slowdown that’s occurring now could be Skyline’s first real test in a more challenging market environment. While management’s execution has been quite good up to now, Skyline doesn’t have the hands-on experience with down markets that older, more established housing businesses do.

Is Skyline Champion a Buy?

Unfortunately, much of the difference between Skyline Champion’s price and value that existed at the beginning of the year has already been resolved. Investors who buy today will pay prices much closer to the stock’s fair value. With that said, Skyline could still be a decent buy for investors seeking moderate, conservative returns.

With practically no debt and excellent profitability metrics, Skyline Champion appears to be a relatively safe stock to hold for the long term. Although the stock could still see ups and downs in the short run associated with macroeconomic conditions, Skyline is a business that could be stable and profitable over many years.

It’s also worth noting that analysts expect growth to begin again after this year’s substantial downturn. Over the next 5 years, the company is forecast to see 1.6 percent average compounded growth. This projection reflects the fact that Skyline will likely be a major beneficiary of eventual economic improvements and a return of demand for newly manufactured homes.

On the downside, Skyline is approaching its fair value and is facing a potentially volatile time when earnings will likely fall significantly. As such, today’s investors could be taking larger risks than those who bought late in 2022 or in the early weeks of 2023. Deeper cuts to earnings or a slower rebound than expected could both hamper returns and cause the stock to underperform in the short term.

Overall, Skyline ranks as a moderate buy that is best suited for investors who are comfortable with slow, steady growth over several years. Investors should be aware, however, that the margin of safety Skyline had priced into it a few months ago has been whittled down considerably.

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.