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Winnebago: On The Road To Recovery?
As manufacturers of big-ticket discretionary items that typically require credit financing and ample gasoline, RV makers took a major pounding during the Great Recession. So great was the damage, in fact, that two well-known companies (Fleetwood and Monaco Coach) declared bankruptcy, with the assets of the latter going to Navistar (NYSE:NAV). As one of the survivors, Winnebago (NYSE:WGO) hopes that the RV boom will enjoy a second act and that the company can recapture past growth and cash flow. (Read about the RV demographic in In Retirement, Snow Birds Leave Cold Weather Behind.)
IN PICTURES: 8 Signs Of A Doomed Stock
A Strong Quarter on an Easy Comp
Given how far sales fell for Winnebago, it stands to reason that the company should be able to produce impressive growth rates if or when it rebounds. Revenue in the company's fiscal first quarter snapped back by 53% over the same period a year ago to $123 million, as the company's unit shipments increased by 40%. Within that, Winnebago saw ever better growth in the highest-priced RVs (Class A) at 59%, with Class C unit sales increasing 44%. Class B sales dropped over 98% (to one unit) as the company left this business. As investors may have already suspected, average selling prices were also up on that higher contribution of Class A units.
Profitability improved, but once again from an easier low base. Gross profit bounced off the bottom and the company produced a gross margin of 9%. That 9% is clearly much better than the year-ago level (of almost nothing), but it's still well short of the mid-teens level that was commonplace a decade ago. Likewise, the company rebounded from an operating loss to an operating profit, with an operating margin (3.5% adjusted) of almost one-third of the old averages. (Take a deeper look at a company's profitability with the help of profit-margin ratios. For more insight, read The Bottom Line On Margins.)
Has Winnebago Company Found a Smooth Road Back?
Two of the company's reported metrics might be reason for pause. The company's backlog dropped more than 50% to less than 700 units. That suggests a book-to-bill of about 0.6, although quarter-end backlogs aren't exactly the same as orders. All in all the backlog may not be much of a problem, particularly since last year's backlog was a function of dealers reacting to rock-bottom inventories. Along similar lines, a 32% higher delivery inventory is a metric worth watching.
Certainly Winnebago is not a guaranteed success story at this point. Rising gas prices will act as a headwind, as will the return of competition as the market improves. Moreover, there are ample potential destinations for consumer leisure spending. It is certainly debatable how much overlap there is between customers of RV makers like Winnebago and Thor (NYSE:THO) and those of Polaris (NYSE:PII), Harley Davidson (NYSE:HOG), Brunswick (NYSE:BC) and so on, but the point is that there are only so many leisure dollars out there and plenty of companies hope to encourage customers to return to their products.
The Bottom Line
As a No.1 or No.2 player in its market niches, Winnebago certainly has ample chance to rebound from a recovery in RV demand. It also helps that the company has no debt, ample cash and valuable brands.The real key in valuing these shares is an investor's conviction in the idea that Winnebago will recapture past glories. On the basis of historical cash flow levels and the current balance sheet and valuation, Winnebago's shares look extremely attractive. That all presumes, though, that Winnebago can not only grow the top line but also go back to generating free cash flow margins above 5%. (Manufacturing output is one of the clearest signs that an economy is recovering from a recession. Read Vital Link: Manufacturing And Economic Recovery for more insight.)
Winnebago's current price seems to discount the idea that the company can deliver high single-digit revenue growth but an inferior level of cash flow relative to past performance. In other words, the stock is pricing in a solid recovery but is falling considerably short of past glories. Investors who believe in a brighter future, though, can still find some value in this name.
IN PICTURES: 8 Signs Of A Doomed Stock
A Strong Quarter on an Easy Comp
Given how far sales fell for Winnebago, it stands to reason that the company should be able to produce impressive growth rates if or when it rebounds. Revenue in the company's fiscal first quarter snapped back by 53% over the same period a year ago to $123 million, as the company's unit shipments increased by 40%. Within that, Winnebago saw ever better growth in the highest-priced RVs (Class A) at 59%, with Class C unit sales increasing 44%. Class B sales dropped over 98% (to one unit) as the company left this business. As investors may have already suspected, average selling prices were also up on that higher contribution of Class A units.
Profitability improved, but once again from an easier low base. Gross profit bounced off the bottom and the company produced a gross margin of 9%. That 9% is clearly much better than the year-ago level (of almost nothing), but it's still well short of the mid-teens level that was commonplace a decade ago. Likewise, the company rebounded from an operating loss to an operating profit, with an operating margin (3.5% adjusted) of almost one-third of the old averages. (Take a deeper look at a company's profitability with the help of profit-margin ratios. For more insight, read The Bottom Line On Margins.)
Two of the company's reported metrics might be reason for pause. The company's backlog dropped more than 50% to less than 700 units. That suggests a book-to-bill of about 0.6, although quarter-end backlogs aren't exactly the same as orders. All in all the backlog may not be much of a problem, particularly since last year's backlog was a function of dealers reacting to rock-bottom inventories. Along similar lines, a 32% higher delivery inventory is a metric worth watching.
Certainly Winnebago is not a guaranteed success story at this point. Rising gas prices will act as a headwind, as will the return of competition as the market improves. Moreover, there are ample potential destinations for consumer leisure spending. It is certainly debatable how much overlap there is between customers of RV makers like Winnebago and Thor (NYSE:THO) and those of Polaris (NYSE:PII), Harley Davidson (NYSE:HOG), Brunswick (NYSE:BC) and so on, but the point is that there are only so many leisure dollars out there and plenty of companies hope to encourage customers to return to their products.
The Bottom Line
As a No.1 or No.2 player in its market niches, Winnebago certainly has ample chance to rebound from a recovery in RV demand. It also helps that the company has no debt, ample cash and valuable brands.The real key in valuing these shares is an investor's conviction in the idea that Winnebago will recapture past glories. On the basis of historical cash flow levels and the current balance sheet and valuation, Winnebago's shares look extremely attractive. That all presumes, though, that Winnebago can not only grow the top line but also go back to generating free cash flow margins above 5%. (Manufacturing output is one of the clearest signs that an economy is recovering from a recession. Read Vital Link: Manufacturing And Economic Recovery for more insight.)
Winnebago's current price seems to discount the idea that the company can deliver high single-digit revenue growth but an inferior level of cash flow relative to past performance. In other words, the stock is pricing in a solid recovery but is falling considerably short of past glories. Investors who believe in a brighter future, though, can still find some value in this name.
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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