Why RV Stocks Can Beat the Market in the Years Ahead

In this segment from Industry Focus, Vincent Shen and Motley Fool senior contributor Asit Sharma discuss the recreational vehicle (RV) industry. They cover some important basics for this promising investment area within the leisure sector, including the tailwinds creating favorable conditions for leading manufacturers like Winnebago (WGO 1.71%) and Thor Industries (THO 2.39%).

A full transcript follows the video.

This discussion was recorded on Feb. 6, 2018.

Vincent Shen: To start our RV discussion, it's important to understand some of the broad industry dynamics, and also the tailwinds that companies in this space have been enjoying since the financial crisis. Asit, can you walk us through some of these basics?

Asit Sharma: Sure. Looking at the Outdoor Industry Association, this is an association which tracks recreation, consumers spent $887 billion in the last year on outdoor recreation. That's an annualized figure. This, to me, is extremely interesting, given the economy has picked up, we see higher GDP growth, if you look at the U.S. economy, it's a $19 trillion economy. So near $1 trillion just on outdoor recreation is a big number.

And sometimes, we overlook companies that can benefit from these trends. The outdoor recreational industry employs about 7.6 million people, so it's a big employer. We're going to talk about RV shipments today, so recreational vehicle, to throw a little bit of lingo at you. These shipments have increased at a compounded annual growth rate of 10% since 2010.

Shen: Something else behind the RV industry that's important to know is, also, some of the tailwinds that I mentioned in terms of the demographics and the consumer confidence that we're seeing, but this is still, ultimately, a very cyclical business, and I'd like to speak to that a little bit. Total RV wholesale shipments, for example, in North America, are the highest they've been in about 20 years, with an estimated 480,000 units going out in 2017.

But that volume will ebb and flow based on a lot of factors, some that I've mentioned -- gas prices, strengthening economy, consumer confidence. There's also availability of financing. And now, there's also an increasing number of retiring baby boomers. For example, industry shipments fell 20% from 1999 to 2001, coinciding with the dot-com bubble burst. They fell by over 50% from 2007 to 2009, during the worst of the financial crisis. But even then, there are some different dynamics between the product categories that fall within RVs. Those segments are something that's very universal to the industry that investors need to understand. Asit, can you talk about some of the key differences between the two major RV product offerings?

Sharma: Sure. This industry is divided into two segments: motorized and towable. When I think RV -- I've never owned one -- I think of the big motorized vehicles, also known as motorhomes. I think that's what most of our listeners are familiar with. These are large vehicles, often resting on a truck chassis. They can range anywhere from $50,000 on up to close to $1 million, if you have the leisure and the resources to really deck out your RV in style. The second part of the industry is also very interesting. This is the towable segment. Basically, you can hitch an RV to your vehicle and tow it. These vehicles are much cheaper. They average between $15,000 and $30,000. They require less repair and maintenance than a motorized home.

Two really opposite poles in this industry. Either you're all in for a very expensive vehicle, which you can camp in. Obviously, it's equipped for riding in as you get to your destination. The other pole is this very cheap offering that younger people, which we'll talk about in a second, in terms of demographics, can afford. You can't ride on it on the way to your destination, but once you get there, it's your second home. These are the two basic poles of the industry. There are some types of vehicles that fall in between these. They generally get shoved over to the motorized segment, like van campers, which some of you are familiar with, the smaller vehicles which are an extension of a typical van-type vehicle. But overall, think motorized or towables. This will become relevant to the rest of our conversation in talking about the economics of this industry.

Shen: And going back to the cyclicality, I'll mention that for this industry, even between these two categories, motorhomes vs. towables, they see different effects from a downturn. For example, motorhomes tend to see a harder hit. They fell 30% in the early 2000s, and 75% during the financial crisis. This part of the market has actually yet to fully recover from its highs from about 15 years ago. I attribute that generally to the higher cost. Towables is a larger market in terms of unit volume. They fell 17% in the dot-com period, compared to the 20% across the industry, and then about 49% during the financial crisis. They have since gone on to establish new highs in terms of industry volume.

Last bit of backdrop, I know you've wanted to speak to this, Asit, before we dive into this company specifically, is some of that demographic stuff. I mentioned the increasing number of baby boomers going into retirement, being interested in acquiring RVs as part of their retirements. But there's also a younger group of customers getting into these products as well, it seems.

Sharma: Yeah. This was surprising to me. I've written a couple of articles this year about this industry. When I was growing up in the 70s and 80s, you associated RVs with retirees. But the industry has really reinvented itself, and it's marketing itself to younger and younger people. The typical RV buyer today is a lot more ethnically diverse, younger than just even a few years ago. In a recent presentation by Thor Industries, who we'll talk about in a moment here, they point out that Latinos, Asians, African Americans, they comprised 39% of new campers in this industry in 2016. And Gen Xers and millennials, if you just look at age groups, generations, comprised 72% of campers in 2016. So it's a whole new wave of potential RV buyers.

Really briefly, what's so interesting to me is, Vince talked about cyclicality of this industry. If you look at even a bigger cycle, it's the cycle of young buyers who are getting in today in these cheaper towable segment vehicles, and then aspirationally looking up, maybe 10, 20, 30 years, moving into the motorized segment as they acquire more wealth. We'll see how that pans out over the long term, but that's an interesting larger cycle overarching the smaller cycles in this industry.