Enterprise Value = $1.25 billion
Operating Income = $162 million
EV/Operating Income = 7.71x
Price/Revenue = .49x
Earnings Yield = 10.59%
Debt/Equity = 51%
Winnebago is an iconic, all-American brand. When you think of RV’s, you think of Winnebago. Winnebago is to RV’s what Harley-Davidson is to motorcycles. Winnebago manufactures two kinds of RV’s: towable (55.9% of sales) and motorhomes (42.7% of sales). Towables are RV’s that can be towed with a truck. Motorhomes do not need to be towed, and the RV itself can be driven. Within the motorhome segment, there is wide dispersion in price depending on what features the buyer wants. A new Winnebago motorhome can range in price anywhere from $80k to $250k.
Winnebago’s business has performed excellently throughout this economic expansion. Sales and earnings have steadily increased without a hiccup. Sales were $212 million in 2009 and have grown steadily every year to $2 billion in 2018. Earnings have gone from a loss of $2.71 in 2009 to a gain of $3.22 in 2018.
Despite the consistently improving results, sentiment against the stock in the last year has been negative. An increase to the 52-week high would be a 51% increase from current levels. The poor stock performance is occurring over trade jitters and concerns that the US might be at a cyclical peak and about to enter a recession.
This is a valid concern. Winnebago was annihilated in the last recession, with the stock falling over 80% from the 2007 peak to the 2009 low. The reasons behind this are obvious. Winnebagos are a massive, discretionary expense. Winnebagos are for fun. No one needs a Winnebago and recessions have a way of clarifying the difference between a want and a need. People are only going to buy them if they are doing well economically and feel good about their jobs. In a recession, sales for brand new Winnebago’s are going to fall dramatically.
I feel a bit dumb at the moment after purchasing this. After I bought this stock, Thor (another RV manufacturer) reported abysmal results and I sold the stock. Additionally, my entire thesis is that the US is not entering a recession. Friday’s lousy jobs report casts doubt on my hypothesis.
With that said, I am sticking with it. I still think that the US economic expansion is intact. I think that the bad jobs reports was only a temporary blip driven by the government shutdown. The two indicators I care the most about, the spreads between both the 2 and 10-year bonds and the spread between the 10-year and 30-year, don’t show signs that the Fed is too tight. Additionally, the Fed has been signaling that they are not going to allow the economy to fall into a recession. Like it or not, whether or not we go into a recession is mostly driven by one institution, and that’s the Federal Reserve. You can complain and shake your fists at this all you want, but that’s the world that we live in.
In terms of Winnebago itself, I think that the long term secular trends favor this industry. As baby boomers retire, they are going to purchase more Winnebagos. RVs also have an appeal to the burgeoning population of people that want to live on the road. I also think that gas prices are going to be constrained due to the fracking industry in the United States. While I believe prices will probably rise slightly in the short term, the existence of the fracking industry prevents them from getting extraordinarily high as happened in 2007 and 2008.
There are many assumptions buried in my analysis so I will be observing this position carefully. With that said, I think investors are being paid for the uncertainty. The P/E of 9.44 compares to a 5-year average of 15. An increase back to these levels would be a 50% appreciation. They are also in excellent financial health. The Z-Score of 5.04 implies an extraordinarily low probability of bankruptcy. The F-Score is nearly a perfect of 8 out of 9. This is a cheap stock in a solid financial position and, as long as we avoid a recession in the near term, it should outperform the market. We shall see.
Fun movie: Sneakers, 1992. “I want a Winnebago.”
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