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Winnebago: It's Time To Buy This Small Cap

August 31, 2014 | About:
Value Investor

Value Investor

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Winnebago Industries (WGO) is engaged in the manufacturing of recreation vehicles which is used in leisure travel and outdoor recreation activities. The company builds motor homes, travel trailers and fifth wheel products under various brand names such as Winnebago, Itasca, SunnyBrook etc. Winnebago markets its product primarily in U.S and Canada on a wholesale basis through diverse dealer organization.

Despite being a well known brand, the company has a market capitalization of just $669 million. Winnebago has high earnings growth estimates and this could be justified by the company’s increasing shipments which would have a direct impact on the revenue growth. In addition to a strong revenue growth, the company is also undervalued. I would therefore strongly recommend the investors to own the stock when you can still get them cheap.

Financials

Winnebago had strong third quarter 2014 results. Revenue grew by 19% to $699.3 million for the nine months ended 31st May 2014 over the last year. This is primarily due to increase in motor home units by 30% and partially offset by the decline in ASPs by 8%.

Gross margin has also improved by a marginal 80bps and this is due to higher delivery volumes, which has resulted in higher fixed overhead cost volumes. This is also a prime reason for 53% increase in Earnings per share.

EBITDA margin has also increased from 5.5% to 7% during the same time period. A higher EBITDA margin suggests that the company has been successful in cutting down its operating expenses leading to a more profitable operation.

The company’s balance sheet also looks strong with no debt and $106.8 million cash and cash equivalent and receivables. In addition to a clear balance sheet, the company also has strong financial returns with Return on Capital of 24.9% and Return on Assets of 13.3%, above industry average of 11.5 and 9.4% respectively. According to analyst estimates, the company will have 45,000 to 55,000 shipments in the current fiscal year as compared to 38,000 shipments in fiscal 2013. This is likely to increase the company’s earnings by 43% in fiscal 2014 and 12% increase in fiscal 2015. In this article, I will further discuss about the drivers which would support growth for Winnebago.

Demography and Economy Supports Growth

With the retirement of Baby Boomers; U.S population aged 65+ is expected to increase by 69% from 2012 to 2030. Since 55-64 age groups are the largest purchasers for recreational vehicles and about 50% of the company’s customers are aged 60+, demography will support growth.

Macroeconomic conditions support the growth, recovery is expected as there are many factors which will drive recreation vehicle industry in the future. Energy availability has been improved with a relative stable gas prices enabling cost conscious customers to purchase RV as it makes them available to operate at cheap rates.

In addition to this, interest rates are expected to remain low considering the current low inflation. This would enable customers to purchase RV at low cost loans. I therefore believe that these factors are good trigger for customers to purchase motor home.

Attractive Valuations

Winnebago is trading at a forward PE of 13.4 below the industry average of 17. Even P/S of 0.7, below 1 suggests undervaluation. However, if we compare the trailing twelve months EV/EBITDA of 9.5 for Winnebago against its competitor Thor industries (THO) 10.3, the company still looks attractive.

Analyst estimate earnings growth of 43% for the current fiscal year, based on current PE of 18, the company forward PEG of 0.4 suggests stock to be grossly undervalued.

Conclusion

Considering recovery in economy and shift in demography with Baby Boomers retirement, Winnebago is likely to benefit in the long term. This is also evident with an already strong third quarter 2014 results.

In addition to this the company also has attractive valuations which make it a must on the investors list. Hence, considering a stock with good valuation and high earnings growth prospect I would recommend it to be a good investment for a term of 2-3 years.

About the author:

Value Investor
A value investor.

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