Skyline Champion Corp. (SKY, $60.81): “The SKY is the Limit”
By: Michael
Ribaudo, AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
- Skyline
Champion Corp. (NYSE: SKY) is a manufacturer and retailer of mobile
homes and manufactured housing. SKY operates in the United States and Canada.
The U.S. accounts for 89% of total revenue.
- SKY operates under the brand names: Skyline Homes, Champion Home Builders, Athens Park Model RVs, Dutch Housing, New Era, and many more.
- Demand for affordable housing remains exceptionally high and housing prices continue to see increases, at a record pace, for the past four consecutive months.
- Demand for manufactured housing is at an all-time high evidenced by SKY’s current backlog of $1.2 billion.
- At the beginning of August, SKY reported Q1 ‘22 revenue of $510.2M beating street estimates of $443.93M and diluted EPS of $0.75 beating estimates of $0.53.
Key
points: Skyline Champion Corp. has seen
exceptional revenue growth over the past quarter. Q1 ’22 revenue has grown 85%
over the same period in FY21. This is due to the extreme demand for
affordable housing. With prices of homes increasing, SKY should see continued
revenue growth and continued demand for its manufactured housing.
SKY’s backlog
has increased 40% QoQ to $1.2B in Q1 ’22. This supports the high level
of demand for this company's product. SKY is being negatively
impacted from turning enough product to meet the demand due to supply chain
restrictions. SKY is actively working to expand production capacity by adding 4
new plants in North Carolina and Texas. These facilities are expected to
be operational by the end of FY22. SKY has hired Dr. Roland Menassa as a
VP of Manufacturing Technology to better automate its operation, increasing
efficiency and lowering reliance on manual labor, increasing output.
Previously, Dr. Menassa brings his past experience with Amazon,
General Electric, and General Motors to SKY.
Although
SKY has increased prices 16% YoY, it has struggled to keep margins up to
due rising costs. Rising input costs are compressing margins and management is
concerned as to how much of these increases can be passed to the consumer.
Increased prices could lead to a decrease in demand. Management
put through a price increase in September to offset inflationary
costs. Lumber costs have decreased recently, but steel, resin, and freight
costs have increased.
The
demand for manufactured housing is still rising and SKY is rapidly expanding
their manufacturing facilities to convert their backlog into sales. SKY’s
growth is limited to what their supply chain can support with keeping margins
intact. The increase in automation may help SKY ramp production leading to a
lower backlog resulting in increased revenue. The improved automation
should also decrease costs associated with manual labor, creating a positive
impact to margins.
What
has the stock done lately?
The past
6 months have treated investors in SKY well. The stock has increased ~44% in
the past 6 months. Most notably, the stock price increased ~20% due to a great
Q4 earnings report in May. The stock price has been increasing since. The
current stock price is hovering around $61.00 which is about ~10% off its 52
week high.
Past
Year Performance: SKY has increased 120% in value over the past
year. SKY’s share price has increased due to the rising home prices, growth in
the first time home buyers segment, and rising demand for affordable
housing. Net income in FY21 increased 46% YoY. Revenue has increased 14% QoQ
and net income in Q1 ’22 increased 27% QoQ.
Since being added to the AIM fund
at $47.00, SKY has exceeded its price target of $55.07. The increased demand
for manufactured housing, the increase in automation and technology, and
increasing home prices all benefit SKY’s business. Their current backlog
coupled with additional manufacturing facilities coming online in 2022,
and the improved management of supply chain issues, position SKY to keep
increasing in value. Holding this equity as part of the AIM Small Cap portfolio
is the best option.
