Investors had high expectations for Winnebago's (WGO 0.90%) latest earnings report despite weak demand trends in the recreational vehicle (RV) industry. The stock, along with that of rival Thor Industries (THO -0.16%), has outpaced the market's rally so far in 2023 on signs of progress at reducing inventory and continued positive profits.
The mid-June quarterly announcement showed more positive momentum on these points, but a full recovery might still be far off for the RV business. So let's look at whether the stock is a buy right now.
Latest results
Winnebago's fiscal third quarter showed some painful impacts from the ongoing cyclical pullback in the RV industry. After several years of rising demand, sales volumes are slumping from the combination of slower consumer spending and rising financing costs. Revenue fell 38% through late May, declining to $900 million from $1.5 billion a year earlier.
Winnebago saw the most intense drop in its towable RV division, which had soared through most of the pandemic. Volumes were down across the portfolio, and price cuts were aggressively employed to keep inventory moving.
Positive trends
Yet there were some bright spots in the update, too. Winnebago's cost cuts helped protect profitability as gross profit margin only declined to 17% of sales from 19% a year ago. For context, Thor reported earlier in the month that its gross margin dropped to 13%.
WGO operating margin (TTM) data by YCharts. TTM = trailing 12 months.
Winnebago remained profitable on the bottom line, too, with net earnings landing at $50 million, or 7% of sales. Operating cash flow was solidly positive at $140 million. Winnebago's diverse product line, which now includes more luxury brands and a marine segment, helped support solid earnings despite weaker RV demand.
"In the midst of a challenging market, our team continues to successfully navigate a dynamic environment," CEO Michael Happe said in a statement.
Outlook and price
Winnebago's challenge today is to keep production levels balanced against sales trends across its dealership network, while still prepping for the next upswing. Dealers continue to scale back on order volumes due to slower customer traffic, which might persist or even worsen over the next few quarters. But the company is also busy developing its next model releases in towables, motorhomes, and boats.
It's great news for the business that Winnebago can remain solidly profitable at a time when overall sales are contracting by nearly 40%. Falling dealership inventory is creating conditions for a sharp rebound, too, when demand trends turn positive once again. These factors help explain why the stock has beaten the market so far in 2023.
And investors don't have to pay a high premium for the stock today. Shares are valued at 0.5 times annual sales, down from roughly 0.9 in early 2021. Thor is valued at about the same price-to-sales ratio, but Winnebago delivers some extra value in the form of a more diverse portfolio of RV products.
The stock looks like an attractive buy today, if you can brace for potentially rocky short-term results over the next few quarters. Cyclical pullbacks are a regular feature of the RV industry, but Winnebago has driven through similar declines in the past and is on track for another strong showing right now.
