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Q1 2021 earnings are about wrapped up so I wanted to check in on a couple names. Funny enough, the stocks that have performed the worst are the ones you’re most keen on seeing results from. Probably stems from the feeling of “what does everyone know that I don’t?” which is, in my view, always the wrong instinct. As a reminder, you can check on the performance of the names I write up vs. the Russell 3000 here. 

Anyway, three names I’ve written on in the past and have underperformed deserve some commentary, Ituran, Skyline Champion and Cavco (with the latter two being related in the same industry). Cavco reports tomorrow, May 27th, but based on Skyline’s results, I also expect a really strong result there and wanted to get this note out ahead of time. 

Ituran

Ituran posted good results with EBITDA +12% Y/Y and ahead of estimates. They are still being impacted by the OEM segment, but the decline is starting to level out as OEM sales in South America start to recover (reminder to go back to my original post – new sales of autos in Brazil were down 99% during COVID. That hurts OEM sales for Ituran obviously…).

The real outperformer was after-market, the bread and butter of Ituran. They gained 25k subscribers, more than the 15-20k they guide to and accelerated from the +21k adds they did in Q4. A recovery here is helping Ituran get almost back to peak subscribers pre-COVID. After-market is also higher margin business.  

The moral of the story is that results were good and the stock is still cheap. You can sort of see why I like the business – It is really high margin and will likely continue to churn out cash (management continues to paydown debt, but even so, you’re buying an 8%-10% FCF yield (using conservative estimates) business at net debt zero).

Couple other things to call out:

• They called out growing more after-market in the US, which was never part of my base case but like to hear it. They have a nice call out in their call about putting profits over no / negative margin growth, which is actually a good snapshot of management’s style.
• Israel had highest car sales ever, Brazil is still recovering but they are gaining share and it’ll come back
• They took out some incremental costs during COVID they don’t plan on bringing back – so check out the EBITDA margins the past 2 quarters compared to Q1’20 – its about 300bps higher.
• They are entering Mexico with a bit more gusto now, positive for the growth story

Skyline & Cavco

Ok Ituran had a nice Q – Skyline had a monster quarter. Please see the original write-up here. EBITDA for the manufactured housing player increased 155% to $51.2MM vs. $33MM estimate from consensus. There was an extra week, but still, sales were up 49% Y/Y. Margins expanded 470bps, likely from fixed cost absorption, in a period of time when investors were (overly) focused on input inflation. This type of margin expansion is insane when you think PY margins were 6.7% of sales…

They acquired ScotBilt homes, but even so, their backlog is ginormous, as I tweeted below. This points to continued fixed cost absorption and pricing power. 

Dear lord, $SKY backlog is at absurd levels

"Total backlog for Skyline Champion was $858.6 million as of April 3, 2021 compared to $127.5 million as of March 28, 2020."

For context, backlog was $188MM Dec 18, $133MM at Dec 19, $488MM Dec 20…. 🚀🚀

— DiligentDollar (@DollarDiligent) May 25, 2021

Recall, one thing I really like about manufactured housing is earnings growth can increase a lot with very limited capital. In this case, EBITDA for the the full fiscal year 2020 (ends 3/31) increased to $135MM from $114MM, but capex was down to $8MM from $15MM.

On the inflation comment, management had an interesting comment about how they can take advantage of supply and supply chain issues in housing:

“Inflationary and interest rate pressures will only hasten the transition away from antiquated site-built methods currently performed today to more modern production practices. Therefore, we are focused on expanding our capacity and investing in automation to enhance our processes.”

Skyline now has $263MM in cash, debt of about $40MM. Lots of flexibility left for this name.

Anyway, Cavco is tomorrow – look forward to that!