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Back To Earth For Skyline Corp. (SKY)

by Sonya Colberg, Senior Editor - 4/26/2016 10:12:36 AM

 
An odd case of mistaken identity has sent Skyline Corp. (SKY) stock on a thrilling flight upward ... where it is perfectly poised for decline.
Skyline shares have traded around $4 for the past year or so. That price looked high for a mobile home company that has lost money for the last seven years and offered shareholders a negative equity exceeding -14%.
But one day, the share price jumped about 89 percent and then rose another 28 percent to around $11 per share.
What is most stunning is why the price apparently took that leap.
And that reason is a key point in this StreetSweeper alert that highlights Skyline's seven most seriously misunderstood and overlooked negatives.
*1. Mistaken Identity
Skyline shares took off the very day that a completely unrelated company issued big news.
On March 9, a news report hit Skyline's news feed on Yahoo Finance with a story headlined, "Vice's new TV channel Viceland will launch on Sky TV in the UK in September."
Bam! People bought Skyline stock.
There was just one problem.
Skyline is a trailer and module home seller ...
 
(Source: Skyline website)
And ...
Sky is a UK entertainment company ....
(Source: Sky news website)
 
Skyline and Sky have nothing to do with one other.
 
The story was based on Sky's announcement that it will launch a new TV channel in the UK and Ireland this fall. Good news for those folks. But a United Kingdom-based TV channel is about as far removed from an Indiana-based mobile home seller as you can get.
 
This line in the story picked up by Yahoo Finance stirred up things even more:
 
"Fox — owned by Rupert Murdoch — has a 39% stake in Sky and a 5% stake in Vice."
 
As shown here, Mr. Murdoch does hold a stake in Sky, the entertainment company.
 
But rest assured, the billionaire who oversees a vast media empire, has no ownership in a mobile home company named Skyline, which trades under the symbol "SKY."
 
The story just got tangled up in Skyline's news headline feed, shown here. The article should be taken down.
 
Once the dramatic mix-up dies down, Skyline investors will be left with six more sobering realities poised to further drive down the price of this dull mobile home company...
 
*2. Industry: Declining
Skyline's losses aren't entirely unexpected because manufactured homes make up one of the market's most disappointing industries.
Manufactured home purchases are continuing to decline in market share. That's because the low cost of conventional housing and low mortgage rates have cut the appeal of mobile and manufactured homes. Families no longer consider pre-fabs and trailers a cost-effective substitute.
In an analysis of the industry, IBISWorld researchers wrote:
"The Prefabricated Home Manufacturing industry is currently in the declining stage of its life cycle."
So the good times for Skyline and the rest of the industry are long gone.
 
*3. Skyline Loses Millions Yearly
Indeed, Skyline struggled for seven years to create net income and finally in fiscal year 2016 netted a meager $352,000.
The stock resumed its trajectory after the recent earnings report showed slightly improved finances.
But net losses have historically exceeded $10 million for each of the previous five years.
 
 
 
(Source: Marketwatch)
 
 
*4. Who's To Blame?
In SEC filings, Skyline blames negative economic conditions as the reason it has "incurred net losses from fiscal year 2008 to 2015." 
But not so fast there, Skyline.
Even considering that the industry is in the declining stages of its life cycle, Skyline still performs drastically worse than competitors.
Let's compare Skyline with chief competitor Cavco Industries (CVCO).
(Source: Morningstar here, here)
 
As our chart shows, Cavco leaders actually increased earnings from 2013 to 2015 from $0.71 to $2.64 per share.
But in that timeframe, Skyline's earnings remained consistently negative ... investors were handed losses of $-1.24 per share and worse.
Yet Skyline's three top executives earn about $765,000 in total compensation. That's more than double the net income the company generated in its fiscal year 2016.
 
*5. Cash Strapped: Stock Offering Looms?
Skyline's cash had fallen to $6.2 million in February. While it was barely operationally positive by $339,000 at last report, last year it burned through ~$4.3 million. But selling and administration costs increased by a couple million to $21.1 million for 2015. Working capital has declined by nearly $7 million to just over $16 million. So cash pressure is still building.
 
The company did receive a last-minute reprieve from a bank holding a $10 million revolver loan that Skyline had broken the covenants on, after company losses exceeded covenant requirements. But the requirement for limited losses returns to no more than $500,000 per month through May. And then Skyline will have to lose no more than $250,000 per month in order to keep the loan.
 
Skyline has had to lean heavily on such financing for years. It will most likely be forced to tap into the revolver. That may keep the wolf from the door for a few quarters but not for long. Also, with shares trading at these inflated levels, it only makes sense for Skyline to conduct a stock offering, with accompanying share dilution.
Investors can see below that the wolf is howling...
 
*6. Going Concern: Auditors Doubt Skyline Will Remain In Business
In a letter to shareholders on page 23, auditors warn: "the Company has incurred recurring operating losses and negative cash flows from operating activities...These matters raise substantial doubt about the Company’s ability to continue as a going concern."
 
*7. Institutions, Analysts: Not Interested
With all the negatives hitting the company in the last several years, Skyline's limited coverage by analysts stopped altogether in 2006. Additionally, institutional interest remains light at 39.5%. Far more institutional shares have recently been sold off than bought.
 
In fact, 41 times more institutional shares have recently been sold than purchased. Adding insult to injury, the company lost a key investor when well-respected Sabby Management sold every share of its Skyline stock.
 
(Source: Nasdaq)
 
*Conclusion
Skyline Corp. shares shot up on another company's thrilling news that most everyone misinterpreted as positive for Skyline. Now, the sound of pounding feet will come as shareholders understand Skyline Corp. and Sky TV are unrelated and Skyline itself is desperately struggling to make money.
 
Those formerly skyward-bound Skyline shares will go screaming back to earth. We expect the stock will fall back to about $3 per share, a very reasonable valuation.
 
 

* Important Disclosure: The owners of TheStreetSweeper hold a short position in SKY and stand to profit on any future declines in the stock price.

* Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to scolberg@thestreetsweeper.org.

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