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Winnebago Industries (NYSE: WGO ) delivered a solid earnings report yesterday, sending shares up more than 3%. The recreational vehicle maker showed off a revenue increase of 29% to $228.8 million, while earnings per share jumped 59% to $0.35. Both figures easily beat analysts estimates at $199.6 million and $0.30, and other numbers were equally impressive as motor home deliveries improved 45% to 2,055 and backlog rose 5.4% to 2,900. The results were particularly impressive considering the severe weather that affected vehicle sales and operations industrywide during the quarter.
The earnings beat was Winnebago's third straight, but there are reasons beyond the numbers to bet on this company's continued growth.
1. Brand name
Winnebago's dominant run in its field is hard to match. Last year, it was recognized as the top-selling motorhome brand for the 40th year in a row, since statistics were first compiled. Great stocks are often built on great, industry-leading brands. That brand recognition provides an economic moat, and is often correlated with outperforming the market. In the way that brands like Coke, McDonald's, and Disney represent their industries, so does Winnebago with RVs. It's the kind of company that has "mindshare," an inherent association with the product it makes. The company has been able to improve market share thanks to consolidation during the recession and now has about 20% of the market. In a cyclical business, a great brand name isn't enough to drive consistent performance, but there are other factors working in Winnebago's favor.
2. Generational shift
The baby boom generation is entering retirement, and the key age demographic for RV buyers is between age 55 and 64. W Estimates show that there are nearly 80 million Americans born between 1946 and 1964. While the industry was crushed during the recession, it is coming back strong with the economic recovery. Overall shipments increased 13% last year, and Winnebago's backlog jumped a whopping 130% in the fourth quarter 2013. As long as the economic recovery remains on track, those numbers should only improve. With stocks surging last year and now hovering at all-time highs, baby boomers have a few extra bucks to spend on their retirement dream. Don't be surprised if more than a few cash out their investments for a dream retirement. Industry RV sales remain below their pre-recession peak, but that demonstrates the opportunity for sales to grow as the economy recovers. Winnebago's revenue of $803 million last year still did not eclipse its 2007 mark of $870 million.
3. Other economic factors
As last quarter's report shows, operational leverage is in Winnebago's favor as it is with manufacturers in general. The company's 29% growth in revenue led to a 58% improvement in operating income as operating margin improved from 5% to 6.1%. That improvement came in spite of weather-related problems that caused work delays, plant closings, and other inefficiencies. Factories remain underutilized, and there is room for gross margins to improve at least above 11%, where it was pre-recession, up from 10.5% in its last fiscal year. Its strong backlog should lead to improved leverage in upcoming quarters.
Finally, management has been aggressively buying back shares, reducing the number of shares outstanding by more than 2% in its most recent quarter. Continuation of that program will help lift per-share profits and the stock price along with it.
Keep on truckin'
There are macroeconomic risks to Winnebago as sales cratered when the economy went into recession back in 2008, but the economic recovery appears to be on track as unemployment is headed lower on stocks are at an all-time high. The steady stream of retiring baby boomers and the improving economy should ensure steadily rising demand, and its brand-name status gives it an economic moat and advantages over competitors. At a forward P/E of just 15, shares could be a steal if profits keep growing at this pace.
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