Skyline Champion Will See Sales Pressure; End Markets Growing (SKY)

Published on the Value Lab 1/7/23

Skyline Champion (NYSE:SKY) is a modular housing company with several construction facilities in the US. Modular housing benefits from scale economies, and SKY has been very good at scaling. The next quarters signal some trouble, and the stock is under pressure because of that guidance, but the end markets still signal strong demand and investors should focus on that given the valuation. SKY remains interesting and a compelling buy case.

Q2 Details

There are some key comments from management that Wall Street analysts have been honing in on.

With the destocking, we expect our third quarter top-line to be flat to prior year and fourth quarter to be down year-over-year. We also saw during the quarter, community and builder customers put their orders on hold due to supply chain issues in their new developments, primarily related to the availability of concrete and transformers.

Mark Yost, SKY CEO

SKY has been under pressure over the last couple of months in terms of performance because of concerns around slowdowns in these markets. Indeed, backlogs have come down by about 25%.

We’ve seen this across several industries, where a reversal in inventory management practices down the chain has started to cause slowdowns up the chain, even when end markets are fine. This is partially because supply chain issues are being relieved, but it is of course also because retailers want to be careful with their cash flow in an environment where they’re less sure if they can sell their inventory – it’s not just base effects. This is the case for modular housing, with slowdowns both on the enterprise side and the consumer side.

But a key fact that points to the former being more true than the latter should be acknowledged by investors.

Despite the near-term rightsizing of dealer inventory and the supply chain dynamics impacting new developments, we see healthy demand in the medium-term. While retailer walk-in traffic is down, the economic conditions and digital leads are driving good credit quality consumers with higher closing rates. As a result, we see year-over-year increases in the number of deposits at many retailers and quote activity remains healthy.

Mark Yost, SKY CEO

Tiny homes and REIT buyers remain strong end markets. Things are still very strong, and in the case of tiny homes the demand has been accelerating.

Bottom Line

SKY is all about scale economies, which is where the benefits of modular housing become most pronounced. SKY has been excellent in opening new facilities at the right time, and sequential as well as YoY volume growth continues to be achieved, as well as increases in price ahead of material costs, where modular housing is relatively less material intensive compared to on-site. It opened facilities when markets were less certain, and their build in share has been phenomenal, with 23% YoY volume growth at flat utilization only because new facilities became available. Pricing grew by about as much as volume leading to YoY sales growth in excess of 50%. They are discussing plans to open an idle facility anew now despite the headwinds from higher rates. With the next two quarters looking murky, these new facilities should be online once the secular picture begins to take hold again on the results.

The multiple reflects the pressure on the stock despite its consistent historical performance, even from outside the liquidity boom post-COVID. 8.57x on a FWD basis is low, and seems to insist that the slowdowns that will be evident in the next couple of quarters will actually be permanent, when they won’t. With more than 11% earnings yield on a promise of growth after a temporary setback, we remain pretty optimistic about SKY’s ability to deliver performance.

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