Was the decline justified? I would argue not quite. Although the results for the quarter were somewhat disappointing, its full-year results were strong.
Following the decline, the stock appears to be very attractive. Let's take a closer look at the company's financials, fundamentals and business model to get a better understanding of its potential.
A weak quarter, but a strong year
As one of the largest manufacturers of factory-built homes in North America, Skyline Champion is not a small company. It has a market capitalization of nearly $3.30 billion and a beta of 1.66, indicating it is highly volatile. Not only can its share price be strongly affected by economic headwinds, but its earnings results as well.
For the three months ended March 31, the company reported a 23% decline in net sales to $491.50 million, a 120-basis point contraction in the gross margin to 28.7% and a 33.5% decline in net income to $57.70 million.
On the positive side, the company reported that the average selling price per U.S. home sold increased 5.6% to $92,700.
While quarterly results were somewhat lackluster, the full-year numbers were more encouraging.
Skyline reported its net sales increased 18.10% to $2.6 billion and the gross profit margin expanded by 470 basis points to 31.4%. Its profitability also showed signs of improvement as earnings per share increased 61.70% to $7.
Further, the company has recorded a five-year compound annual growth rate of 17.70% for revenue and 54% for Ebitda.
Skyline Champion also has a profit margin of 15.65%, which is higher than the Household Durables industry average of 11.31%. Further, the price-earnings ratio of 7.69 and PEG ratio of 0.07 indicate the stock is undervalued.
The company generates positive free cash flows that have grown in the last three years, rising from $127 million in 2021 to $322 million in 2022 and $493 million in 2023.
What is also very positive for this homebuilder is the growth trend analysis. Earnings per share for the past year grew 118.66% and have increased 81.46% over the past five years. Revenue has a grown 59.8% over a five-year period, while free cash flow for the past year has shown a remarkable 277.12% increase.
A strong basis for growth
Skyline Champion has a strong business model that is supported by its healthy operations.
There are several advantages for factory-built houses, which are also known as modular or prefabricated homes, compared to more traditional ones, such as being more affordable, having lower labor costs, achieving production efficiency and offering both perceived value for customers in terms of product improvement and innovation. Another huge benefit is the design flexibility, along with the ability to use sustainable materials and improve energy efficiency.
The appeal of factory-built houses is not the only factor working in the company's favor. Skyline has two other trends supporting its future growth prospects.
The first is the current macroeconomic environment as rising interest rates and inflation push mortgage rates higher. This is making it more expensive for a majority of the U.S. population to buy a traditional home. With its more affordable housing options, Skyline Champion is poised to benefit.
There are also some demographic factors that will benefit the company. According to the U.S. Census Bureau, the fastest-growing age segments within the U.S. are millennials and baby boomers. These groups are expected to make up more than 70% of manufactured home sales based off of data from the Manufactured Housing Institute. As a result, from both a marketing and a business perspective, Skyline Champion is very well positioned to benefit from this demographic trend to achieve higher sales and consistent profitability.
In conclusion, shares of Skyline Champion seem attractive currently as the company has solid profitability, has recently reported a stellar fiscal year and can improve its sales in the coming years based on very attractive economic trends.