Winnebago's Backlog Rises Again

| About: Winnebago Industries, (WGO)


Winnebago, a recreational vehicle manufacturer and seller, offers significant upside.

Strong sales in motorhomes, a high backlog, strong earnings, growing margins, and an established dealer network build a very bullish case.

The one clear risk to the downside, weakness in the towables unit, could weigh on Winnebago.

New Products - Driving strong earnings and lifting margins

In the most recent Winnebago (NYSE:WGO) conference call on December 19th, management noted the addition of three new products. The first product, the ERA 70C, will be the first class B motorhome with a Mercedes-Benz chassis. The different motorhome classes, A, B, and C, refer to the size and chassis of the motorhome. A represents the largest class and C represents the smallest. The next new product, the Vista 36Y, a Class A gas motor home features a "unique galley with a panoramic view". These upgrades to the floor plan of the motorhome are crucial in bringing customers back to Winnebago as they upgrade to a newer, improved model. For towables, the Destination, the "first high-profile Lightbody luxury fifth wheel" was brought onto the market. CEO Randy Potts cites the new products as, "helping to fuel continued growth at Winnebago." Along with the new offerings, over 32 "key features" for 2014 are highlighted on Winnebago's website. These features bring customers into Winnebago's extensive dealer network (see below) to upgrade their current models. Given that Winnebago is an OEM (original equipment manufacturer) of three different "features" companies, revenue from many upgrades flows directly to Winnebago instead of to a middleman. More recently, management made significant inroads into social media with the announcement of their new WinnebaGoLife website. The site functions as a social network for Winnebago owners. Winnebago owners can write about destinations they like to visit and other owners can comment on the post. The low number of present comments can likely be attributed to the extremely recent launch of site. The impact of WinnebaGoLife will be very positive for Winnebago. The demand for RV lifestyle websites certainly exists and WinnebaGoLife links directly to new Winnebago products. Go RVing, a popular RV website, has 270,000 likes on Facebook (NASDAQ:FB). However successful and popular Go RVing is, exclusivity to Winnebago owners can only be found at WinnebaGoLife.

The new products, site, and key features are evidently well received by the market. Winnebago's backlog has risen for eight consecutive quarters and has grown by over 50% since December of 2012. The growing backlog shows that the new products are bringing returning customers back or new customers to the brand. The strong demand, as shown by the growing backlog, is driving EPS much higher. Winnebago will grow 38.1% from 2013 into 2014 and the chart I created below (using data from E*TRADE) shows year-over-year growth for the next several quarters. At 14 times forward earnings, Winnebago is a cheap way to own above average growth.

On top of growing earnings, Winnebago has improved gross margins by ~24% over the past four years. A chart of revenue relative to gross margins from the latest Winnebago investor presentation can be seen below.

This notable improvement in gross margins can be attributed to the aforementioned growing backlog, strong revenue, and established dealer network. Gross margins are calculated by dividing revenue less direct costs by revenue. Given a current gross margin of 10.8% on revenue of $800 million, Winnebago pays $713.6 million per year in direct costs. While this may seem high, the construction and shipment of RV's is an expensive process. On average, the cost of transporting RV's can range from $2.16-2.22 per mile.

Backlog and Dealer Network - The backbone of operations

As stated above, the dealer network is crucial to Winnebago's business. The attitudes and market signals shown by the dealer network are sacrosanct to understanding demand. Given the chart provided by Winnebago below, it is evident that dealers are confident in future sale of Winnebago motorhomes.

The chart above shows Winnebago's current plant utilization. Winnebago's excellent plant utilization flexibility, the ability to shut down or open up existing or new plants, is largely due to the fact that the comapny forbids unionized labor. Furthermore, the increasing plant utilization relative to headcount shows increasing demand as an increasing number of dealers place orders for Winnebago motorhomes. In the latest quarter, CEO Randy Potts added, "dealer networks confidence continues to grow as evidenced by their increasing order position and their inventory levels." The first of two new developments noted by management that came from the last quarter was the successful negotiation of a large rental order. This order will arrive in Q3 2014. Secondly, the launch of the Winnebago Touring Coach line has allowed the company to shift Class B production to a facility in Lake Mills, Iowa from Charles City, Iowa. This move allows production to increase for other classes at the Charles City location. Another aspect to the CEO's remarks, the increasing inventory levels, can be seen in the chart from Winnebago below.

The chart above shows that dealer networks have been increasing their motorhome inventories since 2012. Motorhomes are evidently in greater demand than towables. In fact, the average selling price of motorhomes decreased by 10% last quarter as more lower-end Class A diesel motorhomes were purchased. The increasing orders for the Class A diesel motorhomes is healthy for the company as Class A diesels constitute one-third of total revenue. The increase in motorhome sales for Winnebago, which reached 2,000 units shipped, marks the first time that the company has sold more than 2,000 units in a quarter since 2008. However, one can easily notice the decrease in orders for towables that occurred entering into 2014. As motorhome inventories increased by 63% since 2012, towable inventories have only increased by 17%.

Towables - Risk to the downside

While a new towable was introduced this past quarter, Winnebago's management is well aware of abysmal towables sales. Even though towables margins increased by 2.1% to 7.2%, towables sales decreased 13% in Q1 2014. While weak towables sales are certain to weigh on the business, towables are only 7% of all Winnebago sales. Winnebago's product mix can be seen below in the chart from the latest investor presentation.

By looking at the dealer inventories chart (see above), it is clear that towables are in decreasing demand. Management cited the decrease in towables sales to, "substantial operational changes." Whether or not the operational changes caused less towable units to be shipped to dealers is unclear. A pessimist looks at the decrease in towables sales and sees an evident lack of demand. On the other hand, an optimist cites the operational changes as hindering the transportation of towables to market, thereby lowering dealer inventories and sales. I, for one, see the increase in margins as a good sign. Also, I would keep the fact that motorhome sales, which make up 87% of sales, are strong in mind while towables only account for 7% of total revenue.


While weak towables sales are a potential future drag on Winnebago, increasingly strong motorhome sales are driving earnings higher. Better yet, increasing margins, plant utilization, dealer inventories, backlog, and an established dealer network make Winnebago a strong buy. Investors looking to initiate long positions can either buy shares of common stock or purchase options.

Disclosure: I am long WGO.

Business relationship disclosure: Lionfin Capital is a group of investors.