LCI Industries: Challenging Quarters Ahead

Summary

• The RV market should continue to take a hit as pent-up pandemic demand appears to be over, while macroeconomic conditions weigh on the sector.
• LCI Industries' move toward diversification in order to mitigate risk on one sector is offsetting weakening RV demand.
• Looking ahead for LCI Industries, it looks like a race between the decline in RV sales and the increase in Marine, manufactured housing, and RV aftermarket sales.

skynesher/E+ via Getty Images

LCI Industries (NYSE:LCII) has been enjoying a resurgence in demand in its RV segment since its share price hit a 5-year bottom of approximately $56.00 per share in April 2020. That bottom was before starting a prolonged season of recovery after pent-up demand to get out on the road hit after people were locked in during the pandemic.

Close to a year ago, LCI Industries hit its post-pandemic high of about $163.00 per share, and it has since crashed to a 52-week low of $89.28 before rebounding to just under $99.00 per share as I write.

In the near term, there is no doubt the RV segment will remain under pressure. Further out, it appears the trend will continue to grow as thousands of boomers retire per day, and younger demographics increasingly go the RV route as their choice of how to engage in leisure travel.

In this article, we'll look at the prospects for the RV market in the near and long term, some of LCI Industries' recent numbers, and how its diversified business model is mitigating some of the impact of declining RV sales.

Some of the numbers

LCI Industries' revenue in the third quarter was $1.1 billion, down $33.2 million, or 3 percent from the third quarter of 2021. Lower RV wholesale shipments in the North American market because of declining demand was the major reason for the drop in revenue. Sales from acquisitions added $39 million in revenue in the quarter, pointing to organic sales being weaker than the numbers show.

The company continues to see strength in its content markets, with motorized content up 39 percent to over $3,800, and content per towable RV up 55 percent to a record $5,853. Offsetting some of the decline in RV demand was Marine sales, which were up 22 percent in North America, while content sales contributed $1,792 per unit.

Including all its segments outside of RV, LCI Industries increased revenue by 20 percent year-over-year.

Sales in its aftermarket segment were flat in the quarter, primarily from a decline in automotive sales. After market in RV and Marine offset the drop in automotive sales.

FX cut into revenue growth in international markets, which grew 6 percent year-over-year. Excluding FX, organic growth in international revenue would have been 20 percent.

Net income in the reporting period was $61.4 million, or $2.40 per share, down $2 million, or 3 percent from $63.4 million in net income in Q3 2021. That was attributed to lower RV demand.

EBITDA came in at $119.8 million, up $1.9 million, or 2 percent from the $118 million in EBITDA last year in the third quarter.

Gross margins in the third quarter were $22.4 percent, up from the 21.6 percent in the third quarter of 2021. At the end of the third quarter the LCII had cash and cash equivalents of $23.4 million, with long-term debt of $1 billion. The company's goal is to have long-term leverage of 1.5x net debt-to-EBITDA.

For the first nine months of 2022, LCI Industries generated $486 million from operations.

The secular trend in the RV market

Management stated in the earnings report that there are an estimated 10,000 baby boomers reaching retirement age every day, which is the core demographic in the RV segment.

As for younger demographics like millennials and Gen Zers, a record number of them are entering the space. Citing data from outdoor travel marketplace Outdoorsy, the company said about 70 percent of rental bookings come from those two younger demographics.

The significance of the younger demographics is they trend toward demand for smart technology to be included in their RV purchases. This is a major reason its content business has been growing at a rapid pace.

In the near term, I think we're going to see a temporary pullback in demand for RVs in particular. First, because pent-up demand from the lockdowns has largely been satisfied at this point, with consumers taking a breather, as well as uncertainty surrounding the weakening global economy and rising interest rates which are going to have an impact on sales in 2023.

That said, with the thousands of boomers entering retirement age on a daily basis and the trend from younger consumers to focus on experiences, the secular trend in RVs, in my opinion, remains in place. There will, of course, be bumps on the road, but over the longer term, I think RV sales are going to remain robust.

On the other hand, in the near term, they're going to remain under pressure. Even with the diversification model of LCII, I believe the share price will struggle to regain ground on a sustainable basis until the RV sector shows signs of recovery.

Its diversification strategy

This period of slowing RV demand provides an excellent opportunity for LCI Industries to increase its other segments as a percentage of overall revenue, and if that continues to hold in the quarters ahead, when RV sales start to jump again, it's going to leverage its entire product portfolio stronger than it has been in the past.

One of the major contributors to overall sales outside of RVs at this time is Marine, which was up 20 percent year-over-year. Content per boat was also up 46 percent to $1,792, as mentioned earlier.

Other segments it competes in is manufactured housing, which was up 40 percent year-over-year, along with products like cargo trailers and buses.

On the manufactured housing side of the business, that promises to be a strong segment in the current high interest rate environment because people are seeking affordable places to live. The manufactured housing will probably continue to grow for a number of years because, even when interest rates hit a top and start to come back down, they're not expected to drop to the levels there were before the Federal Reserve started raising them. It could happen further out, but it's not likely to happen anytime soon.

Other steps to diversify LCI Industries' product offering have come in the form of acquisitions, which added about $39 million in revenue during the third quarter. Among the recent acquisitions the company made are Furrion, Girard and Trazcor.

The important thing concerning its diversification model is it offsets the cyclical nature of the RV business, even when it's in a bullish secular trend as it is at this time.

Conclusion

The RV market is probably going to remain under pressure for most of 2023, and possibly longer, depending on how long and deep the recession is, and how high interest rates go before leveling off or pulling back.

For that reason, LCI Industries is probably going to struggle to gain traction, even with some of its other segments doing well. On the Marine side of its business there's no certainty it'll continue to grow as it has been, for the same reasons the RV market is slowing down. I think it'll continue to grow, but not at the levels it has been.

That said, the aftermarket could be strong as people focus on servicing their RVs and other products, instead of upgrading. For that reason it's highly probable that aftermarket, outside of automotive, should do well in 2023.

Taking into consideration all the parts of the company, I think LCI Industries is going to struggle some to offset the declining RV sales, even if its other segments continue to do well.

With that in mind, it appears the next two to three quarters could be challenging quarters for LCII, and it will probably be reflected in its share price.

LCI Industries has dropped a lot over the last year, and even though it's at a good entry point compared to where it's been over the last two years, there could be further downward pressure before LCI Industries finds a bottom. That will be especially true if the market starts to reflect increasing fear from the recession and how the Fed is going to continue to react to high inflation.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.