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Does Winnebago Stock Still Have Room to Run?

By Motley Fool Staff - Feb 13, 2018 at 2:25PM

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Shares of the RV industry stalwart rocketed higher in 2017.

Winnebago Industries (WGO 1.95%) saw its stock post a stellar gain of 76% in 2017.

And in the following segment from Industry Focus, the cast discusses the company's goals for winning greater market share within the recreational vehicle (RV) industry before tackling the current valuation of Winnebago stock.

Is the company overvalued after its bullish run? Watch below to find out.

A full transcript follows the video.

This video was recorded on Feb. 6, 2018.

Vincent Shen: Rounding out our discussion of Winnebago, the balance sheet at the company has typically been debt-free, but they took on over $250 million as part of that Grand Design deal. Management, one of their goals is toward reducing that debt load. And this is not the only deal that the management team has in mind. They're still seeking out additional M&A opportunities, whether that gains them exposure to new markets or new products or to increase their scale. The North American RV market is estimated at about $17 to $18 billion, but there's related platforms and products that can add billions, essentially, to the company's target market. Short-term, while they are reducing that debt, the company is still funding spending and investments in its production facilities. Their operational footprint right now is in three states -- Oregon, Iowa, and Indiana -- but they want to be able to feed and maintain that growth that Grand Design is enjoying, as well as the bounce-back for Winnebago's organic growth.

Last point here from me, longer-term, the company has announced goals of growing their unit market share, right now, from approximately 3% to over 10% by fiscal 2020. They want to grow their operating margin from about 8% to 10%, and they want to have 10% of their revenue come from new businesses that Winnebago is not currently exposed to, again, by 2020. So there's some of that long-term roadmap that Happe was brought in to establish. I think he's done a pretty good job so far. In towables specifically, Winnebago has about a 5% market share, while its two bigger competitors claim about 85% to 90% of the market. So there's a lot of work there still to do. They don't shy away from that fact during the investor day presentation, for example. But they make an interesting point with the Winnebago name being so well-known, they're still only the No. 3 player. The analogy they use, it's like having a name as universal and popular and well-known as Kleenex but being a distant third player in the industry in terms of tissues.

Last point for this company before we move on is, I want to talk about valuation. Given the broad industry growth and latest results, Winnebago's stock is pretty reasonably priced to me. What do you think?

Asit Sharma: Winnebago has, right now, a forward price-to-earnings ratio of about 14x. This is about 3 to 4 percentage points below the total manufacturing industry. It's really about the same or maybe 5 percentage points below the S&P 500's core valuation. Why the valuation of these, despite the stock ascendance of companies in this industry, why they're so low relative to other manufacturing outfits is, the profit margins are quite slim. And this is a risk for investors. In a given year, Winnebago will have net profit of 4% to 5%. And the way it's growing earnings per share and making these huge leaps in net income is through that top line acceleration. You can look at this as the glass half empty or glass half full. If you are an optimist like I am, you can see there's some value here as the company maybe improves margins and expands its manufacturing footprint just a bit, invests in its own capacity, it probably can add 1 or 2 percentage points to its profit margins. And that's good for long-term investors.

On the other hand, that should give you a little pause, that the P/E ratio is so low. My favorite example is the airline industry. That's a risky industry, also very cyclical, and right now, you can buy a good airline for 9x forward earnings. That doesn't mean you should necessarily leap in. For this industry, though, I think long-term, it is a positive investment. It's worth a little bit of risk in this valuation. And I think these valuations can grow -- bottom line -- for both Winnebago and Thor, who we will talk about here.

Shen: Last point I'll add here is, management says that during the average downturn, motorized will decline about 25%, while their towables category will fall about 15%. That's something that these management teams always keep in mind in terms of any downturns that might happen. They keep their operations flexible, so they can adjust their production and supply when that's necessary. I think management said that 80% to 90% of their cost of goods sold comes from labor and materials. These are variable costs that they can minimize when demand weakens.

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Winnebago Industries, Inc.
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