Thor, Winnebago And Drew - A Comparison Of 3 RV-Related Companies

Includes: LCII, THO, WGO
by: Daniel Sermersheim

As the general market hit new highs this past month, so did the three publicly traded companies who derive a majority of their sales from the Recreational Vehicle market. The three companies I can identify in this sector are Thor Industries (NYSE:THO), Winnebago Industries (NYSE:WGO) and Drew Industries (DW). Big ticket items were shunned during the recession, causing thousands of people related to the RV industry to lose their jobs and many RV makers to go out of business. Now, these three RV makers have returned to profits and the stocks have responded accordingly. This article will examine each of these companies and compare their relative merits.

Drew Industries

Drew Industries does not actually make RVs, rather the company supplies a variety of components to the RV market for original manufacture and, to some extent, the replacement parts market. The company also derives around 13% of sales from the truck cap, bus, and trailer market. The company's products include thermoformed kitchen and bath components, furniture, chassis, axles, stabilizers, doors, windows, awnings and entry systems, among other items. Drew supplies many of the components needed to make an RV from top to bottom.

The Income Statement

Drew has reported an increase in sales on a year-over-year basis for the last eleven quarters, while earnings per share have increased during 10 of the last 12 quarters. Sales peaked in 2006 and resumed growth in 2010. This is a strong turnaround after the end of 2008 and the beginning of 2009 showed big issues with profitability and sales growth, due to the financial crisis, on top of already declining sales going into the crisis. The following table shows the past several quarters of income and sales changes:

Year over year comparisons
EPS EPS previous % change Sales % change
1st Quarter 2010 $0.33 ($1.70) vs loss 106%
2nd Quarter 2010 $0.43 $0.12 258% 72%
3rd Quarter 2010 $0.36 $0.34 6% 21%
4th Quarter 2010 $0.14 $0.14 0% 2%
1st Quarter 2011 $0.42 $0.33 27% 15%
2nd Quarter 2011 $0.49 $0.43 14% 8%
3rd Quarter 2011 $0.25 $0.36 -31% 14%
4th Quarter 2011 $0.18 $0.14 29% 50%
1st Quarter 2012 $0.49 $0.42 17% 32%
2nd Quarter 2012 $0.52 $0.49 6% 30%

Source: Nasdaq

However, Drew's earnings increases have not kept pace with sales increases. For the 2nd quarter of 2012, gross margins declined from 22.6% to 18.5% of sales and net margins declined from 9.6% to 7.5%. The company, in its 2nd-quarter SEC filing, explains margins declined due to starting up a new aluminum extrusion operation, a new awning line, higher raw material costs, and the addition of 1100 new employees. With the exception of raw material costs, all of these factors should contribute to growth going forward and not remain as a big drag on margins. These higher costs, calculated by the company, amounted to a reduction in EPS of $0.19 for the quarter ($0.06 for raw materials and $0.13 for the rest).

The Balance Sheet

The following table summarizes the company's balance sheet, based on the 2nd-quarter report:

Diluted Shares Outstanding

22.686 million

Per share Price Multiple
Cash and equivalents $ 1.87 16.01
Total current assets $ 9.02 3.33
Intangible assets $ 4.19 7.15
Total assets $ 18.48 1.62
Current Liabilities $ 4.10 7.32
Total Liabilities $ 5.04 5.95
Equity $ 13.44 2.23

The company has enough current assets to cover total liabilities, and is trading at roughly 2.25 X stockholder's equity. Long-term liabilities are negligible and intangible assets are less than a quarter of total assets and a third of equity. Current assets represent 49% of total assets. These numbers are favorable for a company in an industry that has seen much turmoil in the recent past. I see no red flags out of the balance sheet.

Winnebago Industries

Winnebago produces RVs and travel trailers for sale primarily in the United States and Canada. The company derives all of its sales from these two manufacturing segments.

Income Statement

Winnebago has reported a profit in nine of the last 10 quarters, but has had struggles producing year-over-year growth in earnings. Sales have increased in 10 out of the last 11 quarters. Annual sales peaked in 2004 and the general trend toward declining sales continued into the recession, with sales growth returning finally in fiscal 2010. Note Winnebago was showing sales declines two years before Drew and the losses for Winnebago were much greater during the recession than they were for Drew. The following table highlights the most recent several quarters:

Year over year comparisons
EPS EPS previous % change Sales % change
1st Quarter 2010 ($0.05) ($0.33) loss 17%
2nd Quarter 2010 $0.03 ($0.36) vs loss 79%
3rd Quarter 2010 $0.20 ($0.29) vs loss 165%
4th Quarter 2010 $0.17 ($1.73) vs loss 107%
1st Quarter 2011 $0.13 ($0.05) vs loss 53%
2nd Quarter 2011 $0.11 $0.03 267% -4%
3rd Quarter 2011 $0.04 $0.20 -80% 1%
4th Quarter 2011 $0.13 $0.17 -24% 6%
1st Quarter 2012 $0.04 $0.13 -69% 7%
2nd Quarter 2012 ($0.04) $0.11 loss 23%
3rd Quarter 2012 $0.14 $0.04 250% 15%

Source: Nasdaq

Despite modest sales increases over the last five quarters, the company has not been able to produce EPS growth, with the exception of the latest quarter. The inability to grow earnings despite growing sales is the result of a few factors, including an inventory adjustment, increased input costs, and sales discounts to eliminate inventory of the older models, as reported in the 2nd-quarter SEC filing. However, for the third quarter 2012 gross margins increased on a year-over-year basis, resulting in strong earnings growth. After years of struggling, Winnebago's top and bottom lines appear to finally be developing some positive traction.

The Balance Sheet

The following table is a summary of the balance sheet as reported in the 3rd-quarter SEC filing:

Diluted Shares Outstanding 29.263 million
Per share Price Multiple
Cash and equivalents $ 2.77 4.50
Total current assets $ 6.01 2.08
Intangible assets $ 0.06 193.18
Total assets $ 8.34 1.50
Current Liabilities $ 1.95 6.40
Total Liabilities $ 2.46 5.07
Equity $ 3.93 3.18

Much like Drew, Winnebago's balance sheet presents no major red flags. The company perhaps has a cleaner balance sheet than Drew, with enough cash and equivalents to cover total liabilities and a much higher ratio of current assets to total assets of 72%. The big difference between the two is a much larger amount of intangible assets on the balance sheet for Drew, while Winnebago has hardly any intangible assets to carry. Both companies carry little debt and have a healthy amount of cash.

Thor Industries

Thor Industries is a direct competitor to Winnebago and is the world's largest RV manufacturer, also producing commercial buses and ambulances. 86.6% of sales in the most recently reported quarter were from RVs, while the remainder came from buses and ambulances.

Income Statement

Thor has reported a profit in every quarter of at least the last 12 years, with the exception of the second quarter 2009. Sales have rebounded from the 2009 low to surpass the 2006 peak, as reported yesterday in the fourth-quarter and full-year earnings release. Although earnings have not fully recovered to the previous 2006 peak, the fact sales have managed to fully recover and reach a record level after such a disastrous RV market in 2007-2010 is a remarkable feat. The following table highlights the results of the last several quarters:

Year over year comparisons
EPS EPS previous % change Sales % change
1st Quarter 2010 $0.42 $0.09 367% 15%
2nd Quarter 2010 $0.23 ($0.27) vs loss 90%
3rd Quarter 2010 $0.65 $0.04 1525% 64%
4th Quarter 2010 $0.77 $0.45 71% 51%
1st Quarter 2011 $0.44 $0.42 5% 21%
2nd Quarter 2011 $0.10 $0.23 -57% 22%
3rd Quarter 2011 $0.72 $0.65 11% 25%
4th Quarter 2011 $0.66 $0.77 -14% 16%
1st Quarter 2012 $0.41 $0.44 -7% 11%
2nd Quarter 2012 $0.25 $0.10 150% 13%
3rd Quarter 2012 $0.77 $0.72 7% 9%
4th Quarter 2012 $0.84 $0.66 27% 15%

Source: Nasdaq and the fourth-quarter report

As one can see, sales growth has slowed, but the comparables in 2010 were versus an extremely weak 2009. Gross margins declined slightly from 13.0% to 12.7% in the 4th quarter of the previous year, while net margins were up slightly from 4.8% to 5.0%. Compared with both Drew and Winnebago, Thor's earnings and sales performance is considerably better.

Balance Sheet

The following table shows the major categories of the balance sheet, as found in the fourth-quarter report:

Diluted Shares Outstanding 52.967 million
Per share Price Multiple
Cash and equivalents $ 4.13 8.34
Total current assets $ 12.93 2.66
Intangible assets $ 6.79 5.07
Total assets $ 23.47 1.47
Current Liabilities $ 5.87 5.86
Total Liabilities $ 7.41 4.65
Equity $ 16.06 2.14

Thor's balance sheet, like the other two RV-related companies, is strong. Current assets exceed total liabilities. Current assets are 55% of total assets, while intangibles at 28.9% carry the highest weight out of the three companies in this article. Thor's goodwill amounts to around $5.87 per share and results primarily from acquisitions. The remainder of the intangible assets are mostly being amortized over the course of the next 20 years or so. Nothing on the balance sheet raises a red flag to me.

Comparing The Three Companies

Strictly from an earnings and sales growth perspective, Thor has a huge advantage over Drew and Winnebago. The company is trading at a lower multiple, has managed to weather the recession with only one quarterly loss, and yesterday reported record annual sales. I would have to rate Drew a second in earnings quality, mainly as a result of the declining margins. Winnebago, on the other hand, has had poor earnings even with the economic recovery under way.

Based on the balance sheet, neither of the three companies necessarily stands out. All three companies have relatively low levels of debt, with liabilities to assets within a narrow range across the three. Thor may be trading at a lower price to equity, but Thor also carries the largest amount of intangible assets. None of the three companies has any red flags on the balance sheet.

Thor does pay a dividend of 2.1% (as of 9/26 close), while the other two companies pay no dividend at all. I myself prefer companies buying back shares with their cash versus paying dividends. Since the yield is so low on Thor, the dividend makes little difference to me in comparing the three companies, though there are plenty of investors who would rather go with a dividend-paying company versus one which does not, all other things being equal.

As far as an outlook goes, Drew barely commented on the future up or down in the latest quarterly release. Winnebago sounded optimistic in its latest quarterly release, as the Chairman and CEO commented,

"Our sales order backlog for motorized products was strong going into our Dealer Days event held in May in Las Vegas. This event resulted in even more orders, particularly for our towable products, due to the positive reception to our new product offerings. Our RV inventory on dealers' lots is fresh but at a conservative level, which combined with our higher order position leads us to be optimistic about the remainder of the fiscal year."

Thor was also optimistic in its quarterly release yesterday, with the Chairman saying,

"Assuming stable macroeconomic conditions, we anticipate continuing increases in both of our industries through the remainder of calendar 2012 and into 2013, fueled by growth in RV retail sales, right-sized RV dealer inventories and demand for replacement buses. Thor's RV Open House in Elkhart, Indiana last week was another success. Dealers remain optimistic and demonstrated their confidence in Thor's new RV product lines through their orders."

Both Thor and Winnebago were optimistic about the future and expressed confidence as a result of orders from dealers. Drew, on the other hand, deals with RV makers and may not have the full insight of Winnebago and Thor when determining future sales potential. The industry as a whole is optimistic, growing fast, and these three industry players each have strong balance sheets.

If I had to pick one of the three RV makers to buy, it would definitely be Thor, based on the strong sales and earnings picture, the lowest PE of the three, and its position as an industry leader. For now I would steer clear of Winnebago due to its relative weakness when compared with Thor on the earnings front. All three companies look to be promising going forward and have no significant balance sheet hurdles to overcome. The RV industry looks to have a bright future and the RV companies are solid and have room to grow.

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.