Winnebago Industries May Be About To Run

Jun.24.13 | About: Winnebago Industries, (WGO)

With the summer vacation season in full swing, it is a good time to look at Winnebago Industries, Inc. (NYSE:WGO), which has been enjoying a nice rebound as the effects of the recession slowly dissipate in the overall recreational vehicle industry, and for Winnebago specifically.

Even though sales haven't returned to the pre-recession levels Winnebago is seeking, they have been robust enough to require more hires and longer shifts at the company. Chief Executive Officer Randy J. Potts defines returning to pre-recession levels as 55,000 to 60,000 units sold annually.

Going back to February 2012, the backlog of orders for RVs was 1,004. Moving ahead to February 2013, the backlog has more than doubled to 2,572.

According to the Recreational Vehicle Industry Association, the number of RVs sold in the U.S. in 2013 will be about 307,300, an increase of 7.5 percent over 2012.

Much of this demand has come about from people holding off on buying big ticket items during the recession and its after effects, easier financing at lower rates, and gas prices remaining stable. It is also less expensive to vacation with an RV than it is flying and going on cruises. The Recreational Vehicle Industry Association says cost savings for a family of four are from 23 percent to 59 percent.

In 2012, sales for Winnebago jumped 16.1 percent, and things are looking even better for 2013 and on.

We'll look at the latest earnings figures next and then the outlook for the company going forward.

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Latest Earnings

Winnebago Industries generated revenue of $177.2 million in the second quarter of its fiscal year, up from $131.6 million, or 35 percent, from the same quarter in 2012. The growth was attributed to a boost in unit deliveries and an increase in selling price of 2.1 percent. Revenue would have been even better except for capacity limitations.

Earnings per share was $0.22, beating analysts' estimates. Last year in the same quarter earnings per share was -$0.03. Rising demand has helped lower the pressure to offer discounts in order to generate sales. Leverage is also better on the higher volume, helping to increase margins.

Gross margin was 9.7 percent, up 450 basis points year-over-year. Operating margin was 5 percent, a gain of 590 basis points over the same period in 2012. Net margin was 3.5 percent, climbing 420 basis points over the same quarter last year.

SG&A expenses fell from 6.1 percent to 4.7 percent.

Income Statement

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Cash Flow

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Balance Sheet

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Towables: Challenge and Opportunity

The motor homes of Winnebago are considered the best in the business, and while market share continues to grow with them, the greatest growth opportunity probably resides in the towable portion of the market.

While not all towables are created equal, in most cases they have higher margins than motor homes. The trend towards younger people using SUVs to pull towables is also a good sign towards a growing market within the segment; one that could expand for years if the economy remains healthy.

Winnebago could especially benefit from this trend because its towable unit has been terrible recently, and it really has nowhere to go but up if the company takes care of needs to be there.

In the second quarter the subsidiary took an operating loss of $850,000. In the first half of 2013 it has lost $2.2 million.

The major reasons for the losses, according to Chief Financial Officer Sarah N. Nielsen, "were increased warranty expense due to escalating claim experience and unfavorable overhead variances due to lower production."

Taking into account the increased warranty, wholesale demand fell, resulting in lower revenues.

Towables is now a turnaround situation within the company, and to address the challenges Winnebago hired a new president for the subsidiary in January. A major step taken after taking over that role was to idle one of the two assembly plants where production problems were rampant. It has helped the company to align itself with the demand levels in that market. The idling of the plant is considered a temporary action. Once employee training is completed and demand returns the plant will be reopened.

To deal with warranty and service issues, Winnebago has centralized the leadership responsibilities in that area to the headquarters of the company in Iowa. The company believes it can better leverage its expertise in that way.

In the near term, the company's goal is to reach a breakeven point in the fourth fiscal quarter, and grow out the business from there. If Winnebago can successfully turn this unit around, it has a lot of potential for overall growth, as it continues to grow its market share in the motor home side. And as mentioned earlier, towables usually are a higher-margin item, which bodes well for the results of the company if it can gain market share.

This will be the segment of the market to look at when considering the future performance of Winnebago, as it has the most growth and earnings potential. Since many of the towables are priced much lower than the motor homes, it will also help the company to mitigate slow economic times better, helping to provide a stronger bottom for the share price. The smallest of the travel trailers has especially generated new opportunities for the company.

The challenge in towables for Winnebago is the shoring up of its image and growing market share. It looks like it has taken the rights steps to do that, and now has to convince the market it is a player in the segment. Assuming it successfully navigates these waters, it would be a terrific performer for the company, driving much of the growth in the future.

Dangers Winnebago Faces

The challenge always faced by Winnebago and the RV industry in general is it is totally subjected to the performance of the economy. If the economy is doing well, sales will flourish, if not, sales will diminish. The performance of the industry is also affected by the depth of the weakness in the economy. That is evidenced by the last recession when it resulted in many periods of time when the factories were closed because of little or no business.

What has helped luxury items like motor homes over the last year or so has been the low interest rate environment. In that regard the company looks safe, as Federal Reserve Chairman Ben Bernanke has said that even if stimulus measures are lowered or ended, low interest rates will remain in place. So financing should remain strong in that regard for consumers at least for a couple of years.

As for the U.S. economy, it's still sputtering, and the hoopla surrounding the comments of Bernanke concerning the possibility of tapering the stimulus has been blown way out of proportion, as he said nothing other than if the economic recovery appears to be sustainable in the months ahead, stimulus could be slowed down. That's it! In fact it's nothing different than has been said for a long time.

With Europe still in recession and China slowing, it's hard to know where the growth for the American economy is going to come from. Manufacturing was at its lowest level in China in nine months, and exports have fallen largely due to a slowdown in imports from Europe.

Also important is the jump in interbank lending rates in China, pointing to an unease with China banks lending to one another. This is particularly worrisome because of it being such a large part of the crisis of 2008 when banks also stopped lending to one another in various parts of the world.

Add to this the concerns over the U.S. housing market may reverse its trend in light of Bernanke's comments, and you have a potentially difficult situation facing Winnebago and its peers. The rebound in the housing market has been identified by Winnebago as one of the reasons it has enjoyed a resurgence.

None of this has started to play out on the negative side yet, but there are enough pieces in play to suggest some possible economic headwinds in the future. Providers of luxury products such as Winnebago sells are especially impacted by these negative economic turns because they're among the first products people hold back on acquiring in difficult economic times.

It doesn't look like this will affect Winnebago for the rest of this year, but it could start to make people think of austerity again with their personal finances, possibly slowing growth next year.

As for the American RV market, it will depend on consumer sentiment, and if it remains high Winnebago will continue to do okay. Further out, if interest rates start to rise it could materially affect sales because of higher costs to consumers.

For now Winnebago looks okay, but we're entering a time where the American economy isn't adding up because of the slowdown in Europe and China, which are two of the biggest markets in the world. It will be impossible for the American economy to continue to grow at current levels if those two regions of the world continue to struggle.

Conclusion

Winnebago has some significant tailwinds at this time, the strongest being its growing backlog, which is based upon a positive economic outlook in the recent past. That momentum should carry on for the rest of the year.

Since the share price dropped to $17.25 in the middle of April, it has made a nice move up to close at $20.49 on June 21, 2013. Other than jumping above $22.00 a share in the middle of March for a few days, the stock has traded in a range of about $19.50 to $20.50 a share since the middle of January.

If the next earnings report shows an increase in backlog and growing sales in its towable division, the share price could take a nice jump upward.

The announcement by the Federal Reserve about the possibility of cutting back on stimulus measures shouldn't have any effect on the current quarter and its earnings. It's unlikely it'll even have any effect on the rest of the year, unless something drastic is announced before the end of summer.

While Wall Street was getting hammered after the Fed announcement, Winnebago took it rather well, so that could be a good sign people aren't overly worrisome over the potential event, and it may not even be in their thinking processes yet concerning making buying decisions.

Since the housing market is tied directly into consumer sentiment and consumption habits, if the Fed does pull the plug on stimulus to one degree or another it would adversely impact Winnebago.

The price of gas doesn't appear like it'll be a factor in the near future, as it has been relatively stable even during the busy summer driving months. On that front Winnebago has also improved the gas mileage on the motor homes it produces, making it less costly to drive on a mileage basis than past motor homes had been.

On the positive side, Winnebago has gained momentum after the terrific 2012 it had, where it was the top seller in several segments.

In the U.S. Class A market segment, Winnebago Industries is also the top-selling market leader with 22.2% for calendar 2012. In addition, the Company also led the U.S. Class A gas market segment with 24.2% market share, grew U.S. Class A diesel market share to 19.4% and U.S. Class C market share to 18.5% for calendar 2012.

It looks like Winnebago will continue to grow motor home share, and that will help boost the share price of the stock some, but its real growth area for the future, and the long-term driver of the stock, will be its failure or success in the towable segment. They have little market share at this time, and have a great opportunity to turn that around and generate significant revenue while boosting margins. With a growing backlog, the company appears to have time to take those steps and successfully turn it around.

Assuming the economy remains fairly healthy and the company can vastly improve its towable sales, it has some good drivers to push the share price towards $30.00, and possibly even higher over time. In the near term the backlog ensures support for the stock, and it should perform well.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.