Skyline Champion Corporation

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Skyline Champion Corporation is a leading manufacturer of factory-built housing in North America, with a significant presence in both the US and Canada.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Skyline Champion Corporation (SKY), is a prominent player in the North American housing sector, specializing in the design, production, and sale of manufactured and modular homes, as well as park models and other housing solutions. The company operates through two main segments: U.S. Factory-Built Housing and Canadian Factory-Built Housing. Their products are sold through a network of independent retailers, builders, and developers, making them a crucial part of the affordable housing supply chain.

Competitive Landscape

The manufactured housing industry in North America is relatively fragmented, with several large players, regional players, and smaller independent manufacturers. SKY competes with other manufacturers based on various factors, including product quality, customization options, innovation, price, and relationships with distributors. A key aspect of competition is the ability to efficiently produce and deliver homes while adhering to specific regulatory requirements and building codes.

What Makes Skyline Champion Different?

Skyline Champion sets itself apart through its:

  • Scale: As the largest player in the North American market, SKY benefits from scale advantages in sourcing materials, manufacturing, and distributing products, giving it cost advantages.
  • Network: They have a wide network of independent retailers, builders, and developers in the United States and Canada for distribution, which gives them a certain advantage in distribution.
  • Brand recognition: They are the leading producer of factory-built homes and have multiple brand names under their belt.
  • Integrated Operation: The combination of manufacturing, retail, and finance helps to create synergies.

Revenue Distribution

Based on their 10-K forms, SKY has 2 operating divisions: US and Canada manufacturing.

  • US Housing: This segment is largely in the southeast, south-central, and midwest regions of the United States. The company’s revenue from U.S. Factory-Built Housing accounted for 73.8 percent of net sales for the year ended April 1, 2023
  • Canadian Housing: This segment is limited to a smaller network of retailers. For the year ended April 1, 2023, net sales from Canadian Factory-Built Housing represented 26.2 percent of total sales.

Financial Analysis

Here’s a deeper dive into SKY’s financial numbers, focusing on the most recent performance:

  • Revenue Trends:
    • Revenues have seen significant volatility in past few years mostly related to the housing market.
    • For the six months ending September 30, 2023, net sales were at $2,053.2 million compared to $2,251.6 million in the same period last year, representing an 8.8% decrease
    • Net sales for the three months ended September 30, 2023 was $1,036.4, decreasing from $1,207.4 a year ago.

It seems that revenues are on a decline, and management needs to figure out a way to manage this.

  • Profitability & Margins:
    • The gross profit margin was 22.5% for the six months ended September 30, 2023, compared to 23.2% a year ago, due to increasing material costs and reduced sales prices.
    • For the same period, operating income decreased from $291.3 million to $198 million due to reduced operating leverage, while interest expenses increased. The effective tax rate was 23.1% compared to 24.9%.

Operating profit is impacted negatively as well.

  • Cash Flow:
  • For the three months ending September 30, 2023, cash flow from operations was down almost 400% at $36.9M compared to 145.4M last year

This is a worrying trend as a decline in operating cash flow would indicate that the company is struggling to collect cash and manage expenses efficiently

  • Balance Sheet:
    • SKY maintains a generally solid financial position.
    • Total assets were $1,669.2M and total liabilities were $343.1M, and a debt to asset ratio of 0.2 which looks reasonable.
    • Working capital of 931M provides good liquidity to run the business.
    • They continue their share buyback program, with around 12M shares bought back so far for a total of 1.085 Billion Dollars, as of the latest report.

Risks to the Moat and Business

Despite a leading position in the housing industry and a well defined moat, there are some risks that could hamper the company’s competitive advantages:

  • Dependence on macroeconomic trends: SKY’s performance is closely tied to the overall state of the economy, interest rates, and demand for housing. This includes impacts on the U.S. Federal Funds rate, US 10-year treasury rates, and mortgage rates. Any significant downturn in the housing market or interest rate hikes could lead to a sharp reduction in demand and profitability.
  • Competition: The manufactured housing sector is competitive. While SKY is a major player, the entry of a new player or actions by established competitors, such as discounting prices, could eat into its market share.
  • Commodity Prices: Changes in prices of raw materials, including lumber and steel, can significantly impact operating costs and profitability. SKY has attempted to manage this with supply agreements, however, they are dependent on external factors beyond their control.
  • Regulatory Requirements: The industry is subject to various regulations and building codes, which differ by jurisdiction. Any new or revised regulations could impose additional costs on the company.
  • Geopolitics: Trade disputes and foreign exchange fluctuations can impact their operations and performance.
  • Climate Change: Weather events that are increasing in frequency could also negatively affect demand.
  • Labor Shortages: SKY currently has a significant amount of unfilled jobs and a continued shortage of qualified tradespeople can lead to increasing wages and impacting margins.

The company has had significant labor cost increases over the past few years which has impacted profitability and margins, and it is expected to continue to be an issue.

  • Acquisition Risks: SKY acquired Regional Homes, a large US competitor, in October 2022 and it is still working on integrating it. Integration issues can negatively affect expected gains and synergies.
  • Product Liability: The company has been the target of a number of product liability and warranty claims in recent times, which may affect their profit and reputation.

Business Resilience

  • Diversification: SKY benefits from operations in both U.S. and Canada, which helps to provide some level of diversification from regional economic shocks and market conditions.
  • Strong Brand Portfolio: Through its diverse range of acquired brands, SKY has access to different price points and demographics. This is useful to appeal to a wider variety of customers and helps to protect its revenues.
  • Agility: SKY is aggressively expanding into offsite construction, which can help to quickly cater to customer demand and build structures much more quickly than traditional methods, which increases its agility and adaptability to a dynamic market.
  • Vertical Integration: SKY is vertically integrated. They manufacture almost all products in-house, which allows them to minimize transportation costs.

Moat Rating: 2/5

Skyline Champion has a “narrow” moat. This rating is based on:

  • Strengths: The company has advantages in manufacturing, established distribution networks, and brand recognition. The scale of the business also serves as an advantage.
  • Weaknesses: It is dependent on external factors like raw materials, and government policies, as well as the economic cycle. The company’s moat is also susceptible to competitors if they are able to replicate the process that the company has or make a better offer to customers.

In the present context of the housing sector struggling to provide affordable homes, it may become a more favourable regulatory environment for SKY, which can add to the defensibility of the moat in the future.

Understandability: 3/5

Skyline Champion’s business is moderately easy to understand because:

  • Clear Product: Their product—factory-built homes—is easy to understand and is common in the US housing market, however the process might require a lot of research for new comers.
  • Basic Business Model: Their business model is straightforward, focusing on manufacturing and selling these homes.
  • Industry Dynamics: While the housing market has its nuances, the basic drivers (demand, interest rates) are common knowledge. However, while the business model is simple the accounting and financial aspects are complex and might require a detailed review to understand, hence, a middle difficulty rating is given.

Balance Sheet Health: 4/5

SKY has strong financials based on its current balance sheet.

  • Low Debt: The company has low debt, which makes it less susceptible to swings in interest rates.
  • Strong Working Capital: SKY has enough liquid capital to run the operations without disruption and to invest in business growth, research, and expansion.
  • Good Asset Value: The company’s assets are primarily related to inventory, which can be easily converted to cash. There are some concerns as well:
    • Declining cash flow in recent quarters.
    • Negative revenue growth.

Overall, SKY’s moat comes from the scale and distribution network, but can be affected by competitors if they are able to produce at lower costs or give consumers a better offer. Management is working towards creating further competitive advantages and improving profitability with new acquisitions and streamlining of operations.