Champion Homes (SKY)

Modular home and building manufacturer Champion Homes (NYSE:SKY) missed Wall Street’s revenue expectations in Q1 CY2025, but sales rose 10.7% year on year to $593.9 million. Its non-GAAP profit of $0.65 per share was 15% below analysts’ consensus estimates.

Company Overview

Founded in 1951, Champion Homes (NYSE:SKY) is a manufacturer of modular homes and buildings in North America.

Traditionally, homebuilders have built competitive advantages with economies of scale that lead to advantaged purchasing and brand recognition among consumers. Aesthetic trends have always been important in the space, but more recently, energy efficiency and conservation are driving innovation. However, these companies are still at the whim of the macro, specifically interest rates that heavily impact new and existing home sales. In fact, homebuilders are one of the most cyclical subsectors within industrials.

Competitors in the modular building sector include Cavco Industries (NASDAQ:CVCO), Legacy Housing (NASDAQ:LEGH), and Meritage Homes (NYSE:MTH).

A company’s long-term performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Champion Homes grew its sales at an excellent 12.6% compounded annual growth rate. Its growth beat the average industrials company and shows its offerings resonate with customers.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Champion Homes’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 2.4% over the last two years.

We can dig further into the company’s revenue dynamics by analyzing its number of units sold, which reached 5,941 in the latest quarter. Over the last two years, Champion Homes’s units sold averaged 4.6% year-on-year growth. Because this number is better than its revenue growth, we can see the company’s average selling price decreased.

This quarter, Champion Homes’s revenue grew by 10.7% year on year to $593.9 million but fell short of Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 7.2% over the next 12 months. Although this projection implies its newer products and services will spur better top-line performance, it is still below the sector average.

Champion Homes has bad unit economics for an industrials company, giving it less room to reinvest and develop new offerings. As you can see below, it averaged a 26.5% gross margin over the last five years. Said differently, Champion Homes had to pay a chunky $73.51 to its suppliers for every $100 in revenue.

Champion Homes produced a 25.7% gross profit margin in Q1, up 7.3 percentage points year on year. Champion Homes’s full-year margin has also been trending up over the past 12 months, increasing by 2.7 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as manufacturing expenses).

Champion Homes has been an efficient company over the last five years. It was one of the more profitable businesses in the industrials sector, boasting an average operating margin of 12.8%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Looking at the trend in its profitability, Champion Homes’s operating margin rose by 1.9 percentage points over the last five years, as its sales growth gave it operating leverage.

In Q1, Champion Homes generated an operating profit margin of 7.1%, up 5.7 percentage points year on year. The increase was driven by stronger leverage on its cost of sales (not higher efficiency with its operating expenses), as indicated by its larger rise in gross margin.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Champion Homes’s EPS grew at an astounding 25.1% compounded annual growth rate over the last five years, higher than its 12.6% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Diving into the nuances of Champion Homes’s earnings can give us a better understanding of its performance. As we mentioned earlier, Champion Homes’s operating margin expanded by 1.9 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For Champion Homes, its two-year annual EPS declines of 28.9% mark a reversal from its (seemingly) healthy five-year trend. We hope Champion Homes can return to earnings growth in the future.

In Q1, Champion Homes reported EPS at $0.65, up from $0.62 in the same quarter last year. Despite growing year on year, this print missed analysts’ estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street expects Champion Homes’s full-year EPS of $3.53 to grow 12%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Champion Homes has shown robust cash profitability, enabling it to comfortably ride out cyclical downturns while investing in plenty of new offerings and returning capital to investors. The company’s free cash flow margin averaged 9.9% over the last five years, quite impressive for an industrials business.

Taking a step back, we can see that Champion Homes’s margin dropped by 2.6 percentage points during that time. If its declines continue, it could signal increasing investment needs and capital intensity.

Champion Homes’s free cash flow clocked in at $33.44 million in Q1, equivalent to a 5.6% margin. Its cash flow turned positive after being negative in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, causing temporary swings. Long-term trends are more important.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although Champion Homes hasn’t been the highest-quality company lately, it found a few growth initiatives in the past that worked out wonderfully. Its five-year average ROIC was 38.6%, splendid for an industrials business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Champion Homes’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

One of the best ways to mitigate bankruptcy risk is to hold more cash than debt.

Champion Homes is a profitable, well-capitalized company with $610.3 million of cash and $24.77 million of debt on its balance sheet. This $585.6 million net cash position is 12.1% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We struggled to find many positives in these results. Its EBITDA missed and its EPS fell short of Wall Street’s estimates. Overall, this was a softer quarter. The stock remained flat at $83.50 immediately following the results.

Updated: June 23, 2025 at 11:37 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Champion Homes.

Champion Homes isn’t a terrible business, but it doesn’t pass our quality test. Although its revenue growth was impressive over the last five years, it’s expected to deteriorate over the next 12 months and its diminishing returns show management's prior bets haven't worked out. And while the company’s astounding EPS growth over the last five years shows its profits are trickling down to shareholders, the downside is its cash profitability fell over the last five years.

Champion Homes’s P/E ratio based on the next 12 months is 15.8x. Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $84.64 on the company (compared to the current share price of $62.41).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.