Champion Homes (SKY)

Modular home and building manufacturer Skyline Champion (NYSE:SKY) beat Wall Street’s revenue expectations in Q4 CY2024, with sales up 15.3% year on year to $644.9 million. Its non-GAAP profit of $1.04 per share was 27.8% above analysts’ consensus estimates.

Company Overview

Founded in 1951, Skyline Champion (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).

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Luckily, Skyline Champion’s sales grew at an impressive 11.7% compounded annual growth rate over the last five years. Its growth beat the average industrials company and shows its offerings resonate with customers.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Skyline Champion’s recent history marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 6.1% over the last two years.

We can better understand the company’s revenue dynamics by analyzing its units sold, which reached 6,437 in the latest quarter. Over the last two years, Skyline Champion’s units sold were flat. Because this number is better than its revenue growth, we can see the company’s average selling price decreased.

This quarter, Skyline Champion reported year-on-year revenue growth of 15.3%, and its $644.9 million of revenue exceeded Wall Street’s estimates by 9.2%.

Looking ahead, sell-side analysts expect revenue to grow 5.4% over the next 12 months. While this projection suggests its newer products and services will spur better top-line performance, it is still below average for the sector.

Skyline Champion 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 26.3% gross margin over the last five years. That means Skyline Champion paid its suppliers a lot of money ($73.66 for every $100 in revenue) to run its business.

Skyline Champion’s gross profit margin came in at 28.1% this quarter, marking a 2.8 percentage point increase from 25.3% in the same quarter last year. Zooming out, however, Skyline Champion’s full-year margin has been trending down over the past 12 months, decreasing by 1.6 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs (such as raw materials and manufacturing expenses).

Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.

Skyline Champion 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, Skyline Champion’s operating margin rose by 2.5 percentage points over the last five years, as its sales growth gave it operating leverage.

In Q4, Skyline Champion generated an operating profit margin of 11.3%, up 1.2 percentage points year on year. Since its gross margin expanded more than its operating margin, we can infer that leverage on its cost of sales was the primary driver behind the recently higher efficiency.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Skyline Champion’s EPS grew at an astounding 22.5% compounded annual growth rate over the last five years, higher than its 11.7% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

We can take a deeper look into Skyline Champion’s earnings to better understand the drivers of its performance. As we mentioned earlier, Skyline Champion’s operating margin expanded by 2.5 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 Skyline Champion, its two-year annual EPS declines of 31.7% mark a reversal from its (seemingly) healthy five-year trend. We hope Skyline Champion can return to earnings growth in the future.

In Q4, Skyline Champion reported EPS at $1.04, up from $0.82 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Skyline Champion’s full-year EPS of $3.51 to grow 6.8%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Skyline Champion 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 9.8% over the last five years, quite impressive for an industrials business.

Taking a step back, we can see that Skyline Champion’s margin dropped by 1.7 percentage points during that time. If its declines continue, it could signal higher capital intensity.

Skyline Champion’s free cash flow clocked in at $37.27 million in Q4, equivalent to a 5.8% margin. The company’s cash profitability regressed as it was 7 percentage points lower than in the same quarter last year, suggesting its historical struggles have dragged on.

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 Skyline Champion 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 38.4%, 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. Over the last few years, Skyline Champion’s ROIC has unfortunately decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Companies with more cash than debt have lower bankruptcy risk.

Skyline Champion is a profitable, well-capitalized company with $581.8 million of cash and $24.7 million of debt on its balance sheet. This $557.1 million net cash position is 10.6% 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 were impressed by how significantly Skyline Champion blew past analysts’ sales volume expectations this quarter. We were also excited its EPS outperformed Wall Street’s estimates by a wide margin. Zooming out, we think this was a good quarter with some key areas of upside. The stock traded up 5.4% to $97.80 immediately following the results.

Updated: May 22, 2025 at 11:44 PM EDT

Before making an investment decision, investors should account for Champion Homes’s business fundamentals and valuation in addition to what happened in the latest quarter.

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 flat unit sales disappointed.

Champion Homes’s P/E ratio based on the next 12 months is 22.8x. This valuation tells us a lot of optimism is priced in - you can find better investment opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $96.58 on the company (compared to the current share price of $85.66).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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