Skyline Champion (SKY), mcap=$2.9bn, price $51.22 vs $51.00

$SKY pitch:
– Builder of modular and manufactured homes.
– The current valuation of 5x ’23 EBITDA and 7x ’23 EPS is pricing in a doomsday demand scenario and is well below historical levels.
– The company underperformed traditional homebuilders on concerns that the demand in SKY’s lower-end customer demographic will be disproportionately affected by higher interest rates.
– Investors misunderstand that the trade-down dynamic benefits value-priced manufactured as well as the ‘friendly oligopoly’ nature of the industry.
– Margin improvements will be stickier than the market expects and the demand for manufactured homes is less interest rate reflexive than demand for site-built homes.

$SKY valuation:
– Trades at 4.8x FY23 EBITDA (fiscal year ends April 2023) and 7.3x FY23 EPS, about half of its 5-year averages of 12x fwd EBITDA and 23x fwd EPS.
– With conservative assumptions and an 8.5x FY25 EBITDA multiple, would be $81 stock.

Exp. gain: +60% to $81/share in 2 years.

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