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One of the biggest complaints that people have about the modern era, particularly those who are lower income or middle class, is that housing costs are extremely high. There is certainly a ring of truth to this. For homes that are no longer new, the average price as of November of 2023 was $387,600. For a new home, that price was $488,900, though the median price does drop to $434,700. Regardless of the price, this is a lot of money for most Americans. But not every home is expensive. For those on a tight budget, manufactured housing can be an attractive solution. And one of the companies at the forefront of that is Skyline Champion (NYSE:SKY).
Over the past year or so, I have found the housing market to be particularly appealing. I became especially bullish on it around the middle of 2023. And this was because, even though home sales were plummeting and cancellation rates were surging, the industry started seeing a rebound in net new orders. Add on top of this how cheap shares of many of these businesses were, and there were very few homebuilders that I looked at that I ended up not rating a 'buy'. One of the players that I was a bit more bearish on with a 'hold' rating was Skyline Champion because, although the company caters to a very specific type of end user, shares looked expensive and backlog was on the decline. Fast forward to today, and the picture for the business continues to worsen. On a forward basis, shares look very expensive still. Though if we assume that financial performance reverts back to what it was in prior years, the stock does begin to look cheap.
The good news for investors is that we should soon have new data that will provide additional insight into the overall health of the business. This data will cover the third quarter of the 2024 fiscal year and, according to management, it is slated to be released on February 6th. At present, analysts have a rather pessimistic view of the business leading up to that point. But with backlog stabilizing, the firm could surprise investors with a positive look moving forward.
A great deal of pain
Author - SEC EDGAR Data
From a purely fundamental perspective, things have not been going particularly well for Skyline Champion. Consider, for instance, the financial performance for the business for the first two quarters of the 2024 fiscal year. Revenue during that time totaled $929 million. That's a decline of 39.4% compared to the $1.53 billion generated the same time one year earlier. The vast majority of that drop was driven by lower manufacturing retail net sales in the us. Management attributed this to a 31.4% drop in the number of homes sold and to an 11.7% decline in average home selling prices.
Author - SEC EDGAR Data
With the drop in revenue came a decline in profits. Net income fell from $261.2 million to $96.9 million. Other profitability metrics fared just as poorly. Operating cash flow, for instance, managed to drop from $278.6 million to $129.1 million. And over the same window of time, EBITDA for the company dropped from $814 million to $257.8 million. In the chart above, you can see financial performance for both 2022 and 2023. While 2023 was a rather great year for the business compared to 2022, it does look as though we are starting to fall back to 2022 levels of activity. In fact, depending on how the rest of the 2024 fiscal year looks, the picture could end up even worse.
Author - SEC EDGAR Data
If we annualize the results experienced so far for 2024, it would imply net profits for the business of $149.1 million. Adjusted operating cash flow would be $192.9 million, while EBITDA would come in at $190.3 million. Using these estimates, we can see, in the chart above, how shares of Skyline Champion are priced on a forward basis. We can also see how they are priced using data from 2023. In the table below, meanwhile, I decided to compare the enterprise with five other home builders. What I found was that, using the 2024 estimates, our candidate ends up being the most expensive of the group across the board. Though if we assume that financial performance will eventually revert back to what it was in 2023, then it becomes Truly competitive again.
| Company | Price / Earnings | Price / Operating Cash Flow | EV / EBITDA |
| Skyline Champion | 27.0 | 20.9 | 17.6 |
| M/I Homes (MHO) | 7.8 | 5.4 | 6.1 |
| Tri Pointe Homes (TPH) | 8.6 | 4.5 | 7.2 |
| KB Home (KBH) | 8.7 | 4.3 | 7.0 |
| M.D.C. Holdings (MDC) | 13.0 | 4.0 | 8.5 |
| Dream Finders Homes (DFH) | 12.6 | 7.6 | 9.0 |
The good news for investors is that additional data is just around the corner. At present, analysts are forecasting revenue for the third quarter of 2024 of about $500.5 million. That's down from the $582.3 million reported for the same quarter of 2023. If the first half of 2024 is any indication, a drop in both the number of homes sold and average pricing could very well be on the table below. Unfortunately, this does not bode well for profits. Earnings per share forecasted to be around $0.66. That's down from the $1.44 reported for the third quarter of 2023. That would translate to a decline from $82.8 million to $38.1 million. Of course, investors should also be paying attention to cash flow data when management does release results.
Author
Even though I fully expect that revenue and profits will worsen, there is some good news on the horizon. First, as you can see in the chart below, backlog for the company as measured in dollars is finally stabilizing. In the second quarter of 2023, it stood at a robust $814 million. But between completing backlog, having fewer orders come in, and experiencing high cancellation rates, backlog quickly plummeted. By the end of 2023 it had fallen to $308.1 million. And as of the end of the most recent quarter, it was $257.8 million. Clearly, a bottom is either in or off fully close to it. If investors do see a nice uptick in backlog, then that should be construed as a net positive for the enterprise.
Author - SEC EDGAR Data
Even if we don't see some improvement, I fully believe that the long-term outlook for Skyline Champion is positive from an operational standpoint. For starters, the company has cash that exceeds debt in the amount of $688.7 million. That's a tremendous amount of wiggle room that the enterprise has at its disposal. There's also the fact that as long as a manufacturing housing industry exists in this country, Skyline Champion should do just well. I say this because it is a rather large player in its space. In 2023, for instance, the company sold 25,910 homes throughout North America. The average selling price for one in the US was only $98,000. That gives it a significant cost advantage over traditional homes.
Skyline Champion
The business makes this possible through a massive network of assets that includes 74 retail locations, 47 operating manufacturing facilities, nine logistics terminals, and seven idle plants that can be used for future growth. As you can see in the chart below, the manufactured housing industry fell on some rather difficult times after the 1990s. But ever since bottoming out around 2009, the number of units started to rise again. This is likely in response to consumers, particularly young ones, working for alternative housing arrangements. This is not sheer speculation. It actually shows up in the data. Over 70% of manufactured housing sales come from millennials and baby boomers, with millennials leading the way at 46%.
Skyline Champion
The other good news is that management is using this time to continue growing. Late last year, for instance, Skyline Champion acquired Regional Homes, a rather sizable competitor that has the distinction of being the 4th largest player in its space compared to the number two slot controlled by Skyline Champion. That purchase cost shareholders $313 million net of cash acquired and debt assumed. The total enterprise value was about $458 million. And with EBITDA of $84 million back in 2022, Regional Homes was acquired for a multiple of 5.5 on an EV to EBITDA basis.
Takeaway
I suspect that the upcoming earnings release that will be provided by the management team at Skyline Champion would be rather interesting. I do think revenue and profits will probably weaken year over year just like analysts forecasted. But I think that we will see some improvement when it comes to backlog. Management continues to make interesting investments and if financial performance reverts back to what it was previously, the stock does not look all that pricey. But compared to what else is out there at the moment, I do think more upside can be captured elsewhere. And because of that, I've decided to keep the company rated a 'hold' for now.
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