Comeback Stock Stories: The Fall and Rise of LCI Industries

For this episode of Motley Fool Answers, Robert Brokamp and Alison Southwick enlist Motley Fool analyst Seth Jayson for a discussion of comeback stocks, focusing on a few companies that have been beaten down then turned things around for patient shareholders. They also consider the kinds of circumstances under which Foolish investors will want to jump into stocks that are in the midst of being punished by Wall Street.

In this segment, the company in question is LCI Industries (LCII 0.54%), formerly known as Drew Industries. As a specialist in making higher-end components for RVs, it was seriously exposed to the troubles of the Great Recession, when U.S. consumers sharply pulled back on big discretionary spending and mobile home sales tanked. Share prices fell by more than 85%. But from its 2009 trough to its height late last year, investors could have had a 20-bagger, and the Fools explain what its rebound says about such cyclical businesses and the investment strategies that work for them.

A full transcript follows the video.

This video was recorded on Sept. 18, 2018.

Alison Southwick: Should we move on to talk about a company that I don't know anything about?

Seth Jayson: Yeah! Let's!

Southwick: This is Drew...

Jayson: Well, it was Drew Industries and now it's LCI Industries. They make a lot of higher-end components for RVs. Years ago, it was also a lot of mobile home stuff. It was window panes and things. Now I think of fancier stuff like self-leveling systems and electronics systems that are incorporated inside travel trailers and even motorized RVs.

This is a company that I think is one of the comebacks that's a little easier for investors to spot. I tell the story of this one. This is a cyclical company, because it's in the RV business, and RV sales tend to be cyclical. You sell a bunch and then people stop buying so many, and then they go down. Well, in the Great Recession, RV sales really cratered. People were not going to spend money on big-ticket items like that. This stock, I will just point out, at that point was $6 a share. Six months ago it was about $120.

What happened was after the recovery, we had the longest RV market recovery that I think I've ever seen in history. The absolute level of RV sales, I think, is still below the high-water mark which was in the seventies at some point. But RV sales have just been on an incredible roll.

And LCI, formerly Drew, sells componentry to all these manufacturers. Think of Thor which does Airstream. All the Buffett companies that sell RVs. Winnebago. A lot of them are using lots and lots of LCI components and LCI is not only very good about being profitable while making this stuff, it's very good about using its cash that it generates to acquire related companies and fold them in and improve margins and improve the sales.

This is the kind of company that should be on everybody's recession wish list. It's a company that's going to get pounded when we get a recession, but it's such a good company with such a long history [as long as the balance sheet stays good, which it has] that it's the kind of thing you watch. You wait until everybody hates it and you buy it because it has a much higher chance of having a really great comeback than a company like Chipotle that relies on a brand and just may never get that back.

Southwick: I remember the storyline around RV sales was all the baby boomers are going to retire and they're all going to buy an RV and they're going around America and it's going to be great for the industry. But then that didn't happen. Somehow, I feel like the storyline became that RVs aren't popular anymore because they're gas guzzlers and who needs them. I guess I'm trying to understand a little bit more when you talk about it being cyclical, because it felt like it was more of a big trend and it could be hard to say. Well, the RVs are going to come back. Maybe millennials are going to love camping and they're going to want them.

Jayson: That's turned out to be true, actually. A lot of the growth in the market over the past five years has been to younger buyers. The age has been coming down and people do like to buy these things, drag them, and "camp." And I put camp in quotation marks because for me that means sleeping in a tent and not next door to somebody else at a campground or you're sitting in something that's pretty much just the same as your house.

But the RV industry has done a very good job of creating some cheaper options that still have the amenities that younger buyers want, so the profit levels on those aren't always as good, but they're good enough and they sell in high-enough volumes to really have helped not only the RV makers but the components suppliers like LCI.