Should You Hit the Pavement With Winnebago Industries?

With the bitter cold and accompanying snowfall blanketing areas of the country, the last thing you might expect people to think about is RVs from companies such as Winnebago Industries (NYSE: WGO  ) and Thor Industries (NYSE: THO  ) . Make no mistake about it: the market for towable and motorized RVs is in the off-season. However, often the best time to start looking at certain investment ideas is during the off-season when fewer people are paying attention.

Winnebago results
On Dec. 19, Winnebago reported its fiscal-first-quarter results for the period ending on Nov. 30, 2013. Revenue hopped up 15% to $222.7 million. Operating income soared 60.9% to $16.0 million. Net income jumped 50.8% $11.1 million or $0.40 per share.

What's particularly interesting about these results is that they were achieved during the off-season for RV sales. Since RV homes are used most often for vacations during warmer months, the strongest-selling season tends to be the spring. This is followed by the summer, while the fall tends to be weaker. Despite this, sales and earnings for Winnebago this fall crushed the spring and summer periods. This suggests that demand is surging regardless of season and bodes extremely well for 2014 as we get closer to the even stronger period for RV sales.

CEO Randy Potts stated, "We plan to continue to bring new and innovative products to market and believe we have tremendous growth opportunities ahead. In addition to our new products, the backlog reflects a large rental order to be delivered primarily in our third fiscal quarter, which is incremental to our normal rental business." The fiscal third quarter is the spring quarter. This suggests the already seasonally superior quarter should be a home run.

On the profit side, Winnebago's surge is due to reducing costs per RV and keeping overhead low. Production expanded by 27% which allowed the company to gain leverage on a per-RV basis which improved overall profit margins.

What's driving demand?
While the 15% climb in revenue is certainly good, it doesn't tell the whole story. Winnebago's motor homes segment is where the real growth story is, while it's towable segment is much weaker and masking the overall results a bit. Towables saw a 12.8% decline to $10.5 million while motor homes popped 17.6% to $204.4 million.

The company considers motorized dealer backlog to be the main indicator of demand. Winnebago has seen eight quarters in a row of positive growth. Backlog has surged 58.4% units to 3,534 motor homes and 50.4% to $340.7 million on a revenue basis. Conversely, towable backlog collapsed 78% by units and revenue to just 151 and $3.4 million, respectively.

The Recreational Vehicle Industry Association believes that the exploding demand in motorized RVs is due to a trend in the market of scaling up from towable to motorized RVs due to an improving economy and the availability of cheap financing. This has resulted in cheaper monthly payments and easier affordability of the more expensive motorized RV models.

Superhero competitor
For Thor Industries, it is a similar story. In the last quarter it saw its motorized RV sales explode by 45%. Its backlog more than doubled. CEO Bob Martin believes that the motorized RV market "continues to recover sharply." Chairman Peter B. Orthwein concurs and mentioned that the industry as a whole over the next year should support continued growth for Thor Industries especially in the motorized RV market. These statements, if they prove to be true, also bode very well for Winnebago.

Foolish final thoughts
Winnebago trades at just 13 times next fiscal year's analyst estimated earnings per share. There is a decent chance that these estimates are too modest. For the spring quarter in May, analysts have Winnebago pegged at earnings per share of $0.39, which would be less than the seasonally inferior $0.40 it reported for the fall. Add in the fact that Winnebago already disclosed a large rental order due for delivery in the spring quarter, and it seems as though the analysts watching the company may be caught a bit off guard. Look for them either to raise their estimates over the next few months, or for Winnebago to beat their estimates handily.

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