Industries following cyclical trends often present excellent investment opportunities for investors, but the most critical factor in such investments is timing. Companies tend to lose a huge amount of value when the downward phase of the cycle begins, and there is no point in investing in this downward phase unless there are some visible signs of reversal. It is still usually a good idea to keep the fundamentally strong companies on a watch list even in such times to know where to invest once a reversal takes place. A good example in the slowing recreational vehicle industry today is the small-cap Winnebago Industries Inc. WGO.
Winnebago witnesses declining sales but stable margins
Winnebago is a designer and manufacturer of recreational vehicles and their related products and services. It lost about a fifth of its market capitalization in 2018, but it managed to revive somewhat after the beginning of the new year. There was little to cheer in its fourth quarter, as its top line dipped, and it missed analyst estimates as well.
Winnebago’s management reported revenue of $432.7 million, a 7.6% decrease versus the corresponding quarter of the previous year and $10.36 million lower than analyst consensus estimates per Factset. The fall was largely driven by poor performance across its two core segments: motorhomes and towables. But the broad industry trend was a slowdown in sales. The only saving grace for the quarter was the performance of Winnebago’s marine line of products, Chris-Craft, a recent addition to the portfolio that delivered positive growth.
Winnebago’s net income for the quarter was $21.6 million, down from $22.1 million in the same period last year. The margins remained stable largely because of a positive revenue mix, stable pricing, and motorized operational improvements. In fact, the bottom-line performance is quite impressive considering that the company, along with other players in the industry, is facing inflationary cost pressures and increased dealer incentives.
Strong industry headwinds in recreational vehicles
The RV industry is currently witnessing lower demand due to a cyclical dip that is impacting both the wholesale and retail markets. Further, there is increased inflationary input cost pressure for RV manufacturers. To address the decline in demand, manufacturers are resorting to competitive pricing. On the retail front, dealers are in the process of rationalizing their inventory levels to adjust to these conditions.
Winnebago’s management has its own way of dealing with the slowdown. With investments in diversifying its product portfolio and features, the company has managed to create a differentiated brand for itself. It is relying on the brand value of both its RV brands and is not indulging in price or dealer discounts, which is why its bottom line is stable. In fact, this strategy has actually helped Winnebago triple its market share over the years to about 10% of the RV market, per FSI research data.
Investments in diversified segments
Winnebago has been making key strategic changes to its business portfolio and capital allocation. With the acquisition of Grand Design in 2016, it moved away from being only a motorhomes manufacturer to a seller of both motorhomes and towables. Last year, it acquired Chris-Craft, thus adding marine products to its portfolio.
From the customers’ viewpoint, this is helping Winnebago position itself as a premier outdoor lifestyle company. This is evident from the excellent response that Winnebago’s products have received at key events. For example, management said that they witnessed much interest from customers for its marine products at the Miami Boat Show held in February, especially for its 28 and 35 GT Launch and the Catalina 27 Pilothouse. The response for its Towables segment was also very strong at the RVX show that took place in March 2019 in Salt Lake City.
The company has also invested in transforming its operations. Management consolidated its diesel motorhome operations to a single location, its manufacturing campus in Forest City, Iowa, thus centralizing its product development, supply chain and assembly operations. All these moves are helping the company achieve a better product mix, higher asset efficiency, better throughput and more bargaining power with suppliers and dealers. From a cost management point of view, the company expects about $4 million of savings every year from 2022 onwards.
Low valuations due to the downturn
It would be hard to find a problem with the financial performance ratios of Winnebago. The company has a net margin of 5.24% resulting in a return on equity of 20.05%, which is exceptionally good for the RV industry. It has nominal debt, a good history of margin expansion and a solid Piotroski F-score of 8, indicating very good fundamental strength. But, despite all these factors, the stock is trading at an EV-revenue ratio of hardly 0.63 and a price-earnings ratio of 11.55.
As is evident from the chart, the stock’s valuation multiples are moving exactly along with its price movements. This implies that there is a relatively low impact of revenues or growing margins on the price. Even if the company were to produce a stellar result, the stock would probably remain unmoved if the market perception continues to be negative. In such a scenario, the best hope for existing investors is improved market perception and a multiple expansion after a reversal in the RV industry cycle.
Conclusion
Winnebago CEO Michael Happe stated in the recent earnings call that the company should see wholesale shipments and retail sales reach a new normal by next quarter. While it appears to be an optimistic statement, the company has certainly proven its ability to stay strong in times of slowdown. Whether it is the right time to invest in the stock is not quite clear given the weak macro environment, but Winnebago certainly deserves a place on the watch list of long-term growth investors.
Disclosure: No positions.
