Skyline Champion: A Risky Way To Play Housing

Summary

• Skyline Champion has done well to grow its business in recent years, with particularly strong growth occurring this year.
• If growth in the market continues, the company could be a solid prospect, but it is more expensive than many of its peers.
• Add in the downside risk if the market should slow down and it's just not a prime prospect to consider at this time.
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One thing that works really well for current homeowners as well as for home construction companies is the fact that there is a significant housing shortage in the US. This helps to spur demand for housing and elevates prices for existing homeowners. At the same time, it can prove problematic for those who don't have homes and who want them, as well as for renters who are stuck with continuously climbing rents to pay. One company that offers an alternative to the construction of traditional homes is Skyline Champion Corporation (NYSE:SKY). This business focuses on the construction of factory-built houses that often sell for significantly less than traditional homes do. In recent years, the company exhibited attractive steady growth and this year in particular performance has been impressive. It is difficult to know what the future holds for the company because we don't know how long demand will remain strong for the housing market. But it is safe to say the shares are no better than being fairly valued. Certainly, while upside might exist for investors if current trends persist for the foreseeable future, the risk to the investors who are bullish the company is certainly greater than the risk to those who are bearish.

A unique housing play

Skyline Champion describes itself as the largest independent publicly traded factory-built housing company in North America. As of the end of its latest completed fiscal year, the company operated 40 manufacturing facilities located across 19 states and three provinces in Western Canada. Through these facilities, the company offers a portfolio of manufactured and modular homes, as well as park model RVs, accessory dwelling units, and modular buildings for their customers. According to management, the company's market share in the US manufactured housing space totaled about 17% in 2021. This compares to the 8% market share that it boasted 10 years earlier. For a broader context, the company's overall market share of the US housing market stands at about 2%.

Context the value proposition of a company like Skyline Champion, consider that the average home price in the US today stands at about $404,700. By comparison, in the US market, the average home price of the units that Skyline Champion sells stands at about $63,400. In Canada, where the company generates 7.1% of its overall revenue, this average price is about $82,300. Of course, properties like this tend to be located in lower-income areas and their quality tends to be lower than traditional housing.

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Over the past few years, the financial performance achieved by Skyline Champion has been attractive. The company went from generating revenue of $861.3 million in 2017 to $1.37 billion in 2020. Despite the pain associated with the COVID-19 pandemic, revenue continued to decline through 2021, eventually hitting $1.42 billion for that year. In 2021, the company delivered 19,983 properties in the US. This was down slightly from the 20,110 properties generated one year earlier. However, pricing in the market climbed by 3.9%, taking revenue in the US market up by about $40 million year over year. In Canada, the company increased its home sales from 1,002 properties to 1,231. Interestingly, however, pricing did suffer a little bit, dropping by 2% year over year.

Financial performance on the bottom line has been fairly volatile in recent years, but generally positive. Net profits were negative in only one of the past five years, and in its 2021 fiscal year, net profits totaled $84.90 million. That compares to the $58.16 million achieved one year earlier. More consistent has been operating cash flow. After falling from $34.29 million in 2017 to $31.62 million in 2018, it rose consistently until hitting $153.90 million in 2021. It is worth noting that if you adjust for changes in working capital, the operating cash flow in 2021 would have been a more modest, but still impressive, $112.15 million. Of course, there are other profitability metrics to consider. The example that comes to mind is EBITDA. That metric has risen consistently, climbing from $45.45 million in 2017 to $134.76 million in 2021.

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Into the current fiscal year, topline performance proved to be exceptional. Revenue in the first two quarters of the company's 2022 fiscal year came in at $1.03 billion. This compares to just $595.65 million generated one year earlier. For the US factory-built housing operations, the company has sales increase by 74.6%, driven largely by an increase in the number of homes sold any amount of 3,557. In addition, the company experienced a 23.9% increase in average selling price, plus it benefited marginally from a $54 million acquisition of a firm called ScotBilt. In the Canadian market, sales increased by 92%, driven by a rise in homes sold of 249, coupled with a 27.6% increase in average home selling price.

On the bottom line, things have been exceptional as well. Net profits in the first half of 2022 fiscal year came in at $93.62 million. That compares to the $29.41 million generated at the same time one year earlier. Operating cash flow grew from $63.84 million to $88.89 million, and EBITDA increased from $51.48 million to $135.82 million. Although the company has benefited significantly from an increase in the number of homes sold, it is likely that the rise in price had the most impact on this bottom-line improvement. I say this because, in a low-margin industry, even a small price change can have a significant impact on a firm's bottom line.

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Management has not provided any substantive guidance for the current fiscal year. But if we annualize results seen so far for the year, then net income should be about $270.2 million, while operating cash flow should be lower at $156.2 million. My estimate for EBITDA is $355.5 million. Taking these figures, we can effectively price the business. On a forward price to earnings basis, the company is trading at a multiple of 16.4. This compares to the 28.4 if we use the price to operate in the cash flow approach instead. These don't look awful by any means, especially for a company growing as rapidly as Skyline Champion is. Where the company does look cheap, however, is when you consider the EV to EBITDA multiple of the firm. This comes in at just 11.6. It is important to note that the company does look much more expensive if financial performance reverts back to what we saw in 2021. This would take its price to earnings multiple up to 52.3, its price to operating cash flow multiple to 39.6, and its EV to EBITDA multiple to 30.7.

Company	Price / Earnings	Price / Operating Cash Flow	EV / EBITDA
Meritage Homes (MTH)	7.2	25.6	5.9
Century Communities (CCS)	6.5	25.9	6.0
Beazer Homes USA (BZH)	5.8	22.3	9.5
Legacy Housing Corporation (LEGH)	13.7	11.5	10.9
Lennar Corporation (LEN)	8.1	12.7	7.5

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To put all of this pricing into perspective, I decided to compare the company to five peers picked out from Seeking Alpha’s Quant platform. On a price-to-earnings basis, these companies ranged from a low of 5.8 to a high of 13.7. Using the 2022 figures, our prospect was the most expensive of the group. I then did the same thing with the price to operate in cash flow approach, yielding a range of 11.5 to 25.9, and with the EV to EBITDA approach, resulting in a range of 5.9 to 10.9. In both of these scenarios, Skyline Champion was the most expensive of the group.

Takeaway

At this point in time, Skyline Champion does not look particularly expensive on an absolute basis, even though it is clearly expensive relative to the competition. Having said that, it is unclear just how long this current pricing environment will persist. If demand for housing should weaken and prices decline back to levels seen just one year earlier, shares start to look quite expensive. This suggests to me that while the company could offer attractive prospects if it continues its growth, the risk here is to the investors who are bullish about the firm, not those who are bearish about it.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[brettze]

I had owned Skyline shares decades ago as a conservative pick. Even today, Skyline-Champion still behave as conservative home builder or modular builder that focuses solely toward leased communities as the main source of sales. Skyline-Champion still doesnt appear to be interested in building a network of contractors who develop home land packages and offer real mortgages.. Many people continues to prefer leased land communities for the lifestyle and convenience which they buy modular homes and pay space rent without owning the land.. They seem to like the clubhouse, swimming pool, higher density placements of modular homes . This is their pregrotative. Skyline-Champion just continue to stay pat without changing or branching out into the home land modular developments at all. Skyline-Champion doesnt even own leased land communities at all if any.. maybe very few to matter. They are sticking to their own knittings , pretty much. This is the reason I sold the stock as I gave up hoping that they would branch out into the modular home land package developments at least through partnerships with local real estate developers interested in it. Most of the home land developments occur welll out in the boonies where small developers install modular homes on acreage plots and sell them. This mean drilling for water, installing septic tank and hooking up to electricity and gas, etc . Internet is often non existent so they have to rely on satellite internet service like Viasat or Hughes or even Elon Musk's array of satellites .. It would be a boon for Viasat if more people want to move out into the boonies and have their internet hooked up to the geosats. Some may go alone with cellular phones without any need for PCs or laptops.
Modular home land packages is still not growing as much as I hoped for.. Many still choose to build their own houses out in the boonies instead..

[Out_on_a_limb]

The author doesn't know this area again. Manufactured houses are the cheapest housing one can find in terms of cost at a time of raising inflation. The risk is therefore lower than in other construction companies. Further SKY doesn't hold plots, which are the riskiest part on a balance sheet as they are the most variable part of the housing investment (cf. 2008 when recession occurs). The plot belongs to the buyer of the house.