In roughly two years at the helm of Winnebago Industries (NYSE:WGO), CEO Michael Happe has implemented a simple but effective strategy to spur the company's revenue and profit growth.

Discover which segment of the RV market Winnebago is betting on heavily, and how acquisitions play a role in the company's recent turnaround.

A full transcript follows the video.

This video was recorded on Feb. 6, 2018.

Vincent Shen: Overall, keep in mind that there has been a pretty strong recovery since the financial crisis for this industry. The results for both companies that we're about to talk about have been quite strong, especially in 2017, their stocks have been up. The first one we're going to talk about is Winnebago. Their ticker is WGO. The stock was up over 75% last year, although it's given back some of those gains over the past two weeks. The stock pays a small dividend, yields about 0.9%.

This is a 60 year-old company, and they're best known for their motorhomes. But the business has changed pretty significantly in the past two years under the new CEO Michael Happe. He brought with him a lot of new executives and managers in a push to turn the business around. During the recent investor day that they had in November, they talked about the three strategic initiatives that he was asked to deliver on when he started with the company. They were: 1) to restore the motorhome segment, because Winnebago had been losing lots of market share in that core space; and 2) to become a bigger player in towables because of the strength and growth in that category; and 3) to create a vision for the company's long-term growth.

As Asit mentioned, within towables and motorhomes, there's additional classes and styles. But in terms of broad investing purposes, you just need to understand that before 2016, Winnebago generated a large majority of its revenue, about 90%, from that motorized segment. And that splits is now much more even. The business diversified with the top line coming in at about 45% towables, 55% motorized. And towables already make up the majority of unit volume for the company, as they do tend to come in at the lower price points. And I think a big reason why the company has been picking up in terms of the growth of its business, it's been much stronger in terms of its stock and its general financials in 2017, was due to an acquisition that it closed in late 2016 for Grand Design. Can you tell us a little bit about the story there, Asit?

Asit Sharma: Grand Design RV was a competitor, a smaller company. It was a towable RV manufacturer. This goes back to the goal that Michael Happe had of not just restoring this motorized segment, but diversifying into what was fastest growing. So Winnebago acquired this competitor in November of 2016 for $500 million.

What's happened is, in the most recent quarter, Vince alluded to the fact that overall in the industry, the motorized segment has yet to recover. The growth trends are positive at Winnebago, so the CEO is gradually affecting that motorized recovery. But if you look at this most recent fiscal quarter, which is their first fiscal quarter of 2018, Winnebago had a revenue increase of 84%. And most of that, or nearly all of it, was due to towables. They had a big boost from acquiring this competitor, which also gives them a fresh new brand which they can exploit. The company has a pretty decent balance sheet, so they have some marketing dollars they can invest in targeting consumers.

Out of this revenue jump, 84% total revenue quarter-over-quarter expansion, about 34% came from the acquisition of Grand Design RV. But interestingly, the rest of it -- 50% -- came from organic growth. So you see how the company's native Winnebago brand is also doing very well in this towables segment. Again, looking over at the motorized side, negative 2.4% growth. So this was obviously a key acquisition for them. And in a moment, when we talk about Thor Industries, they actually had a similar sized acquisition, also in 2016. So in this industry, the bigger players are looking to acquire revenue, especially where it's fast-growing, as in this towables segment.

Shen: Yeah. There's definitely been some ongoing consolidation in the space. Something else I want to point out for the Grand Design acquisition, this company was the smaller but fastest-growing player in the industry prior to the deal. The company was founded in 2012, and by 2017 had already shipped its 40,000th unit, so pretty impressive. It was a pretty big purchase, as you mentioned, $500 million, but it gave Winnebago a brand and operational addition that was enjoying 80% compound annual growth since shipping its first unit in 2012, 2013. So really important to establishing that towables business for the company. Towables in general are generally more profitable, and they're also more popular, again, with consumers thanks to that greater flexibility, the lower cost. That shift in the company's top line has been pretty important.

Overall, trailing 12-month revenue for Winnebago came in at $1.75 billion, 70% year over year growth, again thanks to that acquisition. Happe began his tenure with some of those key initiatives to restore motorized, grow towables, establish a long-term road map. We've seen the top line really blow up with the Grand Design deal. The operating margins for the company are trending upwards, as well as free cash flow. The company won't report for some time, but the most recent quarterly results for that first fiscal 2018 quarter had been really strong, definitely keeping with the CEO's goals.

Asit Sharma has no position in any of the stocks mentioned. Vincent Shen has no position in any of the stocks mentioned. The Motley Fool recommends Thor Industries. The Motley Fool has a disclosure policy.