Why Investors Are Enthusiastic About RVs

In this episode of MarketFoolery, Chris Hill chats with Motley Fool analyst Bill Barker about the latest earnings releases. They've got some retail news focusing on the rural markets. Two leading pizza chains announced sales growth. Can they maintain momentum? They talk about the RV space and much more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on May 27, 2020.

Chris Hill: It's Wednesday, May 27^th. Welcome to MarketFoolery. I'm Chris Hill, with me, the one and only, highly caffeinated, Bill Barker. Good to see you, my friend.

Bill Barker: Yeah, the trouble is I'm about to run out. We did so much pre-show here that I'm almost done my coffee, and you know what that's going to lead to.

Hill: Yeah, that's going to be bad news, so let's get through this show as quickly as possible. We've got retail, we've got pizza; we've got pizza news, yes, we do. And we've got RVs in the news. But we're going to start with Tractor Supply (TSCO 1.04%).

Tractor Supply, which is one of those businesses, just like it sounds, they're in the farm supply business. And shares of Tractor Supply up this morning, basically because they updated their guidance for the second quarter. You tell me, was the guidance that good or is part of what we're seeing with the stock, just enthusiasm from some institutional investors who are thrilled that a company, any company, is actually updating guidance when we're in this period of time when so many companies are withdrawing it all together?

Barker: It could be a little bit of the latter. Giving updated guidance this earlier, there's still a month to go in the second quarter. So, to give the guidance that Tractor Supply expects same-store sales growth of 20% to 25% with two-thirds of the time-period down; but it's an extraordinarily big number. And caused, as everything is right now, by the environment of COVID, and they're just in the right place at the right time. Also, they did a number of things before this all started that put them in position to take advantage of this time. Having gone further on their buy online pickup and store program, which more and more people are using, not only at Tractor Supply but other places. And just 20% to 25% same-store sales growth for the quarter is the reason the stock is up 5% today.

Hill: This is not a particularly big company, just if you look at the overall market cap, it's round $13 billion, $14 billion. Is Tractor Supply one of those businesses – because there have been stretches of time where this has been a great stock to own – do you look at Tractor Supply as one of those operators that is an acquisition candidate? Would it make sense for, I don't know, like, a Walmart to just go out and make them an offer? Because they seem to do a pretty good job of serving their base of customers.

Barker: Yeah, they've got a great record with customer focus. And I don't know that they – plenty of places, I suppose, could work their operations into their own, but I don't think that their identity would do well under that. They are advertising themselves as serving the lifestyle out there or out here, I guess. And, of course, more people are spending more time away from cities and are maybe planning on spending large chunks of the Summer or the Fall or next Winter even, away from the locations where there's likely to be the largest spread at any time before there's a vaccine. And they've been doing this for a long time, so they have a mindset which is more oriented around the smaller town, the rural lifestyle. And so, you know, how their customers would look at an acquisition by a major player, I don't know.

They don't need it; they don't need to be acquired. Their balance sheet is in great shape, it's getting even more healthy. And they're one of the companies that really is planning to continue share repurchases. You know, with 20% to 25% comp growth, that's going to improve their margins, their earnings are actually going to improve by much more than that because of the margin improvement. And with all that money they've had a, sort of, a pretty consistent 100 store count growth more or less. As they expand further and further West, they're not really going to change seemingly their store count growth. So, that extra money is likely to go, among other places, in share acquisitions. But I think also, they, in their announcement, listed a number of additional hires and raises, sort of, just across the board.

Hill: Raymond James came out with a report on Tractor Supply this morning. Among other things, quoting the CEO of MasterCard, who said that, "Rural is the new urban." Is it?

Barker: No. That doesn't make sense. [laughs] It's like saying black is the new white or whatever. But, I think, to the degree that that makes any sense, we will probably touch on this with RVs, the CEO of MasterCard was referring to it more in the travel category. And so, whereas destinations for travel, frequently and will continue to still include cities, but a lot less so this Summer, this year. I think people will be getting outside and spending dollars to travel to places that are not cities.

So, whether that helps; you know, the travel isn't going to help Tractor Supply too much; it's really more the do-it-yourself community and people. They also have ownership of Petsense, which is a smaller scale competitor to PetSmart and other pet places. There's growing adoption of pets. So, they're both in the right place with the positioning of the rural lifestyle and also the pets.

Hill: Let's move on to pizza, because we had news out of both Papa John's (NASDAQ: PZZA) and Domino's (DPZ -0.95%). Domino's said that same-store sales in the U.S. for the first two months of the quarter were up 14%. Papa John's is estimating that for the month of May, same-store sales growth is going to be 33.5% in North America. [laughs] That's -- well done, Papa John's.

Barker: [laughs] Yes. Now, two things about that. One, the stock isn't doing all that much today in response to this news. In part, you know, Domino's had already come out yesterday with its numbers of being up, I think, maybe 20% for the month of May or, sort of, mid-April to mid-May, so Papa John's should have good numbers, 33%, 35%, even better, obviously. Stock is not really moving up because largely it was priced in, it's in comparison to last year when Papa John's was still suffering, I think, from much of the PR fallout around Papa John himself.

And so, I think the number, while extremely good, is not capturing the imagination of the market today because I don't think that people expect it to continue. That was capturing, sort of, the month where just about everybody was on lockdown, that's probably as good, in some sense, as good as it's going to get for Papa John's, at least until next Winter perhaps.

And I think that as much as this is going to have led to people adopting Papa John's, downloading the app, and that's going to increase the usage going forward, it's an outlying number that you wouldn't really want to incorporate into the future.

Hill: Do you think Shaquille O'Neal is in this for the long-haul? I mean, we talked about when he came on the Board and got some ownership and all that. And I don't see him in all of their commercials, he's certainly featured in some of them. And I think if he's in it for the long-haul then that probably bodes well for the business, but I'm not sure he is.

Barker: I would have to say, "I have no idea," [laughs] not having researched it and not feeling a need to speculate on Shaquille O'Neal's mindset on this one. If it's working out, he's enjoying it, then he'll keep doing it. I imagine, he's got his fingers in a few different businesses. He associates with others that have had successes, you know, trying out a number of different business opportunities.

And, you know, he was the right face at the right time to change people's perceptions. So, I would hope he is, but I don't know that he's got to do, you know, a whole lot on a day-to-day level with that investment.

Hill: Well, and now that I think about it, obviously, he's not doing the NBA Halftime show on TNT, because that's not happening. So, maybe he does have the time to do it.

Barker: But that's coming back.

Hill: Maybe. [laughs] Maybe it is.

Barker: If the NHL is back, then the NBA will be back. The NBA will be back. It may not be in front of fans, but they'll play games and we will watch them on TV and he will comment. That's my prediction. I am much more sure about that prediction than whether he has a long-term mindset for Papa John's.

Hill: Fair enough. Let's move on to the world of RVs, because you had sent me an article that The Wall Street Journal did about recreational vehicles basically being the safest way to travel this Summer. And I'm wondering if this is actually going to be a moment for the recreational vehicle industry.

Because we were talking before we started the podcast that this is an industry, you followed this for a while, and for whatever reason, it is completely located in Central Indiana; that's where, I think, all of the public companies in the RV space are located. And there have been stretches of time where this has been a fantastic industry to be invested in.

So, given where we are in the pandemic, given the data you're seeing, which really seems up-and-down in terms of RV shipments to more recent data points, what is the state of the RV industry right now as you see it?

Barker: Well, having watched for a while, the state of the RV industry, it's highly cyclical. And so, there was a time about three years ago, when a number of very good years, record-setting years for RVs, supplemented by the narrative that millennials were adopting the RV lifestyle in a way that really hadn't been done by other generations as young. And this was leading to millennials getting the, sort of, starter, the lower-end RVs. And then if they kept with it and made it part of their lifestyle for their lives, they would upgrade overtime to more and more expensive ones as their families grew and as they had more money.

And this led to an oversupply of RVs as, sort of, the dealers, in particular, bought into this and oversupplied, going to about two years ago. And then the last two years or a year-and-a-half, there's been a working down of the inventory that had grown on dealer lots, and then everything shut down.

And so, what you've had is the worst numbers ever in terms of shipments for April, I think they were down more than 80% for the industry, which makes sense. The factory stopped producing RVs and their dealerships were closed; maybe doing some online business.

But as things started to open up in some locations in May, you had Camping World, which is the largest publicly traded RV dealer, announcing they'd had their best weekend ever at the beginning of May. You had articles in, like, The Wall Street Journal. And you've got, what are RVs typically competing against, they are competing against cruises, they're competing against flying, staying in hotels, going to resorts. These are all things which people are putting off right now doing. And I think that RVs are in a sweet spot to be able to tell the story that you can bring your family, you could know where your food is, you know where you're setting down, you park, you've got social distance between your camping spot and the next one over.

And at the moment, the stocks are reflecting widespread investor enthusiasm, which the market did not have a month-and-a-half ago. You've got the major player in the industry, Thor, their stock is up, I think, almost 150% from the bottom, which was in the beginning of April.

Now, I don't know, are you going to get an RV this Summer?

Hill: I am not, but I understand the temptation and I understand the appeal of it. I think, [laughs] just to get personal for a moment, I would need to feel confident that I could drive an RV other than just, like, on the highway. I feel pretty good, like, out on the highway, that's fine. Pulling off the highway, parking, you know, little things like that, that's where it's like, alright, I feel like I would need to essentially rent one and test it out then I --

Barker -- I think we've talked about -- you've driven a pretty big vehicle in your past, right?

Hill: There have been a couple of times where I've driven, like, 10-wheeler trucks. One for a Summer job I had, and then a very large moving van, so.

Barker: So, you can handle an RV.

Hill: I guess.

Barker: I'm betting on you. You had the experience. [laughs] So, an additional thing that is working to the advantage of RV sales is the growing peer-to-peer rental of RVs. So, the places that are sort of the Airbnbs of RVs. So, if you're going and you're wondering, well, should I buy an RV? You've got dealers telling you, "Hey, you know what, you can make money off this." Certainly, right now that story is going to hold. If you want to buy this, use it for two weeks a year and rent it out the rest of the year, I can tell you, you know, everybody wants an RV right now. So, that's what is being pitched, I'm sure, on dealer lots, probably will lead to a few more sales whether it turns out that owning an RV is a good way to make your money or payoff your monthly installment. I don't know.

But it's the environment of low gas prices, low interest rates and a narrative that you'll be able to just, like, buying a vacation home, you may buy that and then plan on renting it out often enough to pay off the mortgage. RVs fit into that category as well. We'll see how it plays out.

Hill: What about you? Are you getting an RV?

Barker: Not getting an RV. No. [laughs] I am going to be spending time outdoors, but fortunately my father has a place that I can go to this summer to spend a little time outside.

Hill: And when you say, "fortunately" you mean fortunately for all other people on the road.

Barker: I'll just be driving a normal car this Summer, so nobody -- unlike yourself, I don't have the experience of driving tractor trailers and buses and semis, so you know.

Hill: [laughs] Real quick before we wrap up, because I've never seen the show Billions, I don't have Showtime, I hear very good things about the show, but I've just never seen it before. But I know you mentioned this to me earlier. I don't know if you mentioned it on MarketFoolery.

But you said there was going to be a scene in an upcoming episode of Billions featuring court tennis, a sport where in the past you've been a national champion. So, have you seen the scene? I think it aired on Sunday, have you seen it, and did they do it justice? Did you feel like, as someone who has excelled at the sport of court tennis, did you watch that scene and think, "Okay, they got it right."

Barker: No.

Hill: [laughs] Wow.

Barker: Well, they weren't playing with an actual court tennis ball, they were playing with a tennis ball. So, that right there --

Hill: -- that's strike number one.

Barker: -- [laughs] is a pretty big strike on, did they get it right? If you're watching a scene from a basketball movie and they happen to be playing with a soccer ball or a nerf ball, that would be, kind of, the comparison, because it's much easier to hit a tennis ball than a court tennis ball.

So, the court that they shot it on, Tuxedo Park in New York, a beautiful court, showed itself very well. And they were dressed in all white as is required at that club, and just about every other court tennis court that I know of. So, yeah, they got certain aspects of it right. They had trouble, I think, finding stunt doubles who could make it look like they knew how to hit a ball properly, so they didn't bother, they just had the actors hit and they looked like they had probably, you know, swung a tennis racket a couple of times in their lives, but not a court tennis racket.

Hill: You know, if only they could go back in time and reach out to you, come in as a consultant. I mean, The Motley Fool has consulted for HBO programs in the past, like, you know, Showtime, if you're listening, just reach out, we'll help you out.

Barker: What shows are those? I don't know these stories.

Hill: A little show called The Sopranos. You've seen that clip, haven't you?

Barker: I mean, it's coming back to me, tell me more.

Hill: So, there was an episode where Tony Soprano's wife was concerned about money and wanted to learn more about investing and that sort of thing. And so, one of our folks, and I'm blanking on who it was, but one of the people at The Motley Fool basically created a fake main page of Fool.com. And so, there's a scene in The Sopranos where she's sitting at a computer and she's on Fool.com and she's doing research because she's looking to learn how to invest.

So, you know, we're trying to help everybody. We're trying to help the world invest better, and that includes Mrs. Soprano.

Barker: That includes organized crime apparently.

Hill: [laughs] Apparently. I can't think of a better way to end this show. Bill Barker, thanks for being here.

Barker: Thanks for having me.

Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.

That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd, I'm Chris Hill, thanks for listening, we'll see you tomorrow.