One of the most beaten down industries, not surprisingly, is the Recreational Vehicle manufacturers. They have declined an average of 50% after falling over 25% last year.
While the longer-term trend of baby boomers retiring and choosing to pursue leisure in this fashion is most likely intact, it has come under severe pressure due to the explosion in gasoline prices and the implosion of the housing market and consumer confidence. Rising input costs haven't helped the manufacturers either. With gasoline prices reversing, sentiment perhaps bottoming and the stocks still severely oversold and undervalued, perhaps the time is right to consider investment and bet on some pent-up demand being released.
I recently purchased Thor Industries (THO), which I have followed for many years, but there are some smaller companies that probably make sense as well. This is an industry that Warren Buffett has historically liked, as his Forest River is one of the larger players in the industry. Here are the 7 publicly traded companies that I have identified:
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As I mentioned, THO is the company I know best. I have been impressed by its high inside ownership, decentralized management process, strong balance sheet and now valuation. The company is an industry leader. While it derives 84% of its sales from RVs (the balance from small and medium sized buses), the vast majority is from "towables" as opposed to "motorized".
I would expect towables to do much better in coming years due to their lower cost, lower fuel consumption and lower reliance upon financing. While every analyst would say THO is a great company, the chart below indicates they don't say it's a great investment. This is one of my favorite contrarian indicators!
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As far as THO, I believe that it is using its industry strength as the lowest-cost and best capitalized participant to take share and potentially eliminate some competition. Its inventory remains a bit higher than I would like to see, but I believe that is consistent with its strategy.
As it comes out of the downturn and restores margins towards its norms, the stock could rapidly advance. I have set a target of 32 over the next year. My comments on the rest of the smaller companies will be briefer due to my lack of familiarity.
Drew Industries (DW) actually looks as compelling if not more so than THO. DW is a supplier of components to the industry, with direct exposure to THO and high exposure to the towable segment as well. 74% of sales come from its RV segment, with the balance from manufactured housing.
The valuation is quite low off of depressed earnings and the company appears to maintain reasonably high gross margins over time of 24% or so. It also has a strong balance sheet. This is one I intend to investigate further.
Winnebago (WGO) is poorly positioned and bleeding badly. It is pure RV, but it is in the motorized segment. Its balance sheet is debt-free, but stuffed with inventory, which, in the recent quarter, rose 22% from a year ago while sales plunged 40%. I will leave this one for the deep value experts!
Skyline (SKY) has just 29% exposure to RVs, with the balance in manufactured housing. The balance sheet is very strong and it trades at book value (which is half cash). It focuses on the towable segment.
Fleetwood (FLE) is troubled. The company has 70% exposure to RVs (mix of towable and motor), with the balance in manufactured housing. The balance sheet is quite stretched.
Monaco (MNC) is a pure-play, with a large emphasis on motorized. The balance sheet is stuffed with inventory and lacking much cash. Additionally, short-term debt has been rising. The situation looks quite precarious.
Finally, Coachmen (COA), has 75% exposure to RVs (mix of motorized/towable), with the balance in manufactured housing. Like MNC, the balance sheet looks rather weak, with inventories growing, though not to the same extent. Debt levels are high relative to non-inventory assets.
THO and DW look to have the most promise, especially in the near term, though SKY probably merits further investigation as well. One of the greatest challenges to being contrarian is to get the timing right, as being way too early rather than a little early or a little late can be very costly.
In the case of these stocks, the leaders have bounced nicely thus far this quarter, yet aren't too terribly far from multi-year lows. The three stocks that I have highlighted as perhaps the best near-term all share the traits of a strong balance sheet with significant cash, though SKY is definitely burning some of its massive cash horde. These survivors should emerge from the downturn stronger than the rest of the industry.
Disclosure: Author holds a position in (THO).