Foolish Forecast: Champion Enters the Ring

The turnaround story continues. This time last year, manufactured housing was an industry in despair, and Champion Enterprises (NYSE: CHB  ) was reporting a penny-a-share loss to Wall Street. Last quarter, the company didn't just reverse that loss -- it crushed the Street's estimates, earning $0.20 per share against an expected $0.13. Will Champion retain its title when it reports earnings tomorrow morning? Let's look at some numbers that might suggest an answer.

What analysts say:

• Buy, sell, or waffle? Three analysts still follow Champion, and each rates it a buy.
• Revenues. They're looking for the company to post 34% sales growth, to $326.5 million.
• Earnings. They're also looking for a replacement of last year's loss with a $0.16-per-share profit.

What management says:
Champion's biggest news shouldn't play a big part in tomorrow's report. The company reported closing its acquisition of new U.K. subsidiary Calsafe Group (a modular-home manufacturer) on April 7, meaning that Calsafe's numbers should begin showing up as part of Champion's results next quarter. Likewise next quarter, expect to see Champion's debt rise by the $80 million loan taken out to finance the buy.

So much for "strengthening our balance sheet," one of several accomplishments cited by CEO William Griffiths in the February earnings report. But his other statements appear to be holding true. Sales and margins rose in Q4 2005, despite lower-than-usual margins on the company's sales of 2,000 manufactured homes to the Federal Emergency Management Agency to help house the survivors of last year's hurricane season.

What management does:
Speaking of margins, those continue growing. And remember, when a firm is already scraping by on bare-bones margins, any improvement at all can translate into a huge boost in profitability. As you can see below, Champion has doubled its profitability over the past 18 months -- discount-priced homes for FEMA or no.

Margins %	10/04	1/05	4/05	7/05	10/05	12/05
Gross	16.4	16.7	17.4	17.6	17.3	17
Op.	3.5	4	3.7	4.1	4.1	5.1
Net	1.5	1.7	2.9	2	2.2	3

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Last quarter, I warned Fools to watch both accounts receivable and cost of goods sold at Champion, because both had been rising more quickly than sales, threatening both margins and free cash flow. Heading into tomorrow's announcement, we've got good news and bad news for you. Cost of sales over the last six months is now only pacing sales growth -- both up 33% year-over-year. Accounts receivable, in contrast, rose 63% on average over the past six months, accelerating in the fourth quarter. That's not surprising, with so much of the company's sales now owing to the federal government, but not good news either.

Competitors	Suppliers
Cavco (Nasdaq: CVCO  )	Drew Industries (NYSE: DW  )
Fleetwood (NYSE: FLE  )
Palm Harbor (Nasdaq: PHHM  )

Fool contributorRich Smithdoes not own shares of any company named above.