What a brutal six months it’s been for Champion Homes. The stock has dropped 29.3% and now trades at $64.30, rattling many shareholders. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.

Is there a buying opportunity in Champion Homes, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Is Champion Homes Not Exciting?

Even with the cheaper entry price, we're cautious about Champion Homes. Here are three reasons why we avoid SKY and a stock we'd rather own.

1. Weak Sales Volumes Indicate Waning Demand

Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Home Builders company because there’s a ceiling to what customers will pay.

Champion Homes’s units sold came in at 5,941 in the latest quarter, and over the last two years, averaged 4.6% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.

2. EPS Took a Dip Over the Last Two Years

Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.

Sadly for Champion Homes, its EPS declined by more than its revenue over the last two years, dropping 28.9%. This tells us the company struggled to adjust to shrinking demand.

3. New Investments Fail to Bear Fruit as ROIC Declines

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).

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, Champion Homes’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.

Final Judgment

Champion Homes isn’t a terrible business, but it doesn’t pass our bar. After the recent drawdown, the stock trades at 16.3× forward P/E (or $64.30 per share). Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're pretty confident there are superior stocks to buy right now. Let us point you toward one of our top software and edge computing picks.

Stocks We Would Buy Instead of Champion Homes

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