Winnebago Industries

Introduction

Winnebago Industries (WGO) is a leading outdoor lifestyle product manufacturer operating in the Recreational Vehicle industry, holding 9% of market share. It operates out of 3 cities in the United States, and sells mainly to dealers within the US, and to a lesser extent Canada as well.

Its RV products can be divided into two main segments: motorhomes and towables. Motorhomes are self-powered, motorized RVs that have many amenities like sleeping, cooking and entertainment facilities. They are larger, pricier and have more amenities than towables, which have to be attached to vehicles like SUVs to tow them. Both towables and motorhomes are mobile lodging used as temporary housing during vacations, camping trips, etc.

Industry trends

The RV industry has enjoyed 9 straight years of growth, recovering nicely from the 2008 Financial Crisis. RV shipments have increased from 285, 789 in 2012 to 539,900 in 2018, from which RV producers have benefited greatly.

This can be attributed to, most importantly, strong economic growth, improved housing markets and heightened consumer confidence since 2009 that has resulted in strong demand for RVs. The RV industry is famously cyclical, with RVs having a high income elasticity of demand due to it being deemed a “luxury” product. Low interest rates and cheap energy have also contributed to the RV boom.

The RV industry is forecast to experience future growth, primarily due to favourable demographics. A surge of baby boomers are entering into retirement, and are at the age where RV ownership has traditionally been the highest as RVs allow them to spend more quality time with their families. RVs are growing in popularity among millennials (the fastest growing market segment for RVs are those aged 35-44), who feel that RVs provide a richer, off the beaten track experience compared to the standard hotel and airfare formula. This allows companies to capture consumers young, who often purchase multiple RVs throughout their lifetime.

In addition, advancements in technology throughout the industry have made RVs more attractive to own. Towables are lighter and require less horsepower to haul around, coinciding with booming sales of trucks and SUVs capable of having towables, and new entertainment gadgets on board make cross-country outings more exciting.

Catalysts for Growth

Winnebago has, so far, successfully capitalized upon the increase in popularity in towables, with their lower prices and ease of mobility particularly attractive to millenials. This segment now accounts for 87% of all RV sales, with motorhomes responsible for the other 13%. Winnebago acquired Grand Design Recreational Vehicles, a startup specializing in towables, for $500 million in 2016, to expand into the towables market, which at that time accounted for about 9% of Winnebago’s revenue. By mid 2018, towables accounted for 57% for Winnebago’s revenue through organic growth. Market share increased from 1% to 5% of the towables segment in the same time frame, with an incremental revenue of about $300 million, showing that there is still a long runway for growth.

Winnebago has, very recently, also made inroads into the marine recreational lifestyle market with the acquisition of iconic boatmaker Chris-Crafts famous for its craftsmanship and quality. With both Winnebago and Chris-Crafts having premium business models, it appears a good fit and allows Winnebago to diversify its revenue sources within the outdoor lifestyle market and leverage upon Chris-Crafts strong brand reputation. With the boating market forecast for long-term future growth, Winnebago intends to invest in increased production capacity to generate organic growth. Chris-Crafts also has a luxury customer base less sensitive to economic cycles that can hedge against the cyclical nature of the RV industry. Lastly, with a carefully controlled “built to order” manufacturing and dealer inventory management, Chris-Crafts can share its best practices with the similar Winnebago model.

Financials

Winnebago has a track record of steadily increasing earnings that demonstrate its good management and future earnings potential. Annual gross profit and EBITDA both increased every year from 2014 to 2018, at a compounded annual growth rate of 30.3% and 27.9% respectively. Earnings per share has steadily increased from 1.64 to 3.24 in the same time frame.

Winnebago’s capital allocation has also been efficient. It’s Return on Equity is for 2018 is 20.27%, and has hovered around 19-20% for the past few years, roughly in line with the auto industry average of about 21% and with its main competitors, Thor Industries and LCI Industries who have ROEs of 23.77% and 20.86% respectively. Further DuPont analysis puts Winnebago in a good light. Its asset turnover ratio is a healthy 1.6, higher than the industry average of 0.77. Its net profit margin is has also been steadily increasing from about 4% in 2013 to 5.4% in 2018.

It must be qualified, however, that while Winnebago has traditionally remained debt-free, with several acquisitions in the past few years, its equity multiplier is 2.12 and its debt-to-equity ratio has risen to about 55%. This is not alarming, as Winnebago’s weighted average cost of capital (which includes debt) is about 9.64%, while its return on invested capital is about 15.91%. This shows that Winnebago has made smart acquisitions that have generated good returns, and is reflective of its standing as the industry leader in manufacturing premium RVs.

Winnebago’s cash flows are in a good position as well. Operating cash flow has increased from 23 million to 87 million from 2014 to 2018, as has free cash flow from 12.76 million to 54.68 million. Winnebago has successfully converted its earnings growth into cash flow growth that can reward investors.

As such, I believe that Winnebago is an undervalued stock. It’s P/E ratio currently is about 7.94, well below the industry median of 15.55. It’s trailing PEG ratio is favourable as well, at 0.30 compared to industry average of 1.43.

Risks

As previously mentioned, the RV industry is cyclical as it is highly dependent on economic and wage growth. Due to the financial crisis, RV shipments dropped by 53% from 2007 to 2009, causing Winnebago’s net revenues to drop by 75% in the same time period. Such macro trends are out of Winnebago’s control and hence its strong growth may not be sustainable, especially as a flat RV market is predicted in 2019.

Another imminent threat is the imposition of aluminium and steel tariffs. Both materials are used heavily in construction of RVs, and steel and aluminium prices have risen by 28% and 19% respectively since the start of 2018. While Winnebago is trying to change its method of production to minimize the use of these materials, it has also been forced to implement limited price increases that could threaten future sales. The full impact of tariffs will only become clearer in the future, but is a major concern to the RV industry.

Conclusion

I believe that Winnebago represents a good investment opportunity and is a buy option. It has good growth prospects, as evinced by its rising earnings and cash flows, fuelled by smart acquisitions. Although it has taken on debt to do so, it is at a manageable level and rate of return exceeds the cost of capital. Although the uncertain macroeconomic environment could pose a threat in the near future, I believe that in the long-term, Winnebago can capture more value in the RV industry.