Winnebago Revving Up for the Long Term

The recreational vehicle maker is streamlining its manufacturing, increasing sales and dealers, and all around dominating its industry. With an appealing valuation to seal the deal, there is little reason not to like this company.

Michael Lewis
Michael Lewis
Apr 1, 2014 at 12:00AM

Winnebago Industries (NYSE:WGO), despite its relatively small market cap, has long been considered a bellwether for the state of the big-ticket item world. For years now, that indicator has been a green light as the recreational vehicle maker consistently comes in on top of estimates and shows strong sales of products. Over the past two years, the stock has risen roughly 165%, yet Winnebago remains appealingly valued at under 15 times forward earnings. The big-ticket items are not indicative of the economy as a whole, but the future looks good for this iconic road warrior.

Hitting the pavement
Winnebago is the No. 1 motorhome business in the United States, and the motorhome industry is soaring. Motorized unit sales were up 45% in the just ended quarter. Twenty-two percent of these sales came from products that were introduced in the past year.

This last bit is very interesting as it shows Winnebago, though known for its core, highly recognizable vehicles, is finding traction with newer products and likely recently acquired customers. Average sale price for motorized products was down nearly 10%. Management attributes this again to the newer products, some of which hold lower price points.

Towable products, though trending downward on the trailer segment, ended up growing average sales nearly 10% due to a new fifth wheel product -- the Winnebago Destination. The fifth wheel segment grew 40%.

Winnebago is putting the pedal down on expanding its production capabilities and streamlining operations. The company recently moved into a new factory in Iowa, which is already producing vehicles. An overall effort to vertically integrate the manufacturing process should contribute meaningfully to gross and operating margins in the long run, though the short-term results showed  a slight contraction in gross margin due to upfront costs.

The road ahead
The company maintains a healthy-looking backlog, especially for motorized products. The 2,900 ordered vehicles are a 5.4% gain over the prior year's already-robust figure, but was down slightly compared to the preceding quarter.

All in all, this business is growing nicely and offers investors easily forecasted demand trends in the near and medium term. Winnebago is bringing its manufacturing systems all under one umbrella, giving it a good shot at top-line growth and perhaps even greater bottom-line growth.

Valuationwise, this is still an appealing business. Compare Winnebago to Polaris Industries. Polaris is a more diversified vehicle and towable manufacturer, in addition to being a larger business, but the two have been performing similarly and witness the same macro-level trends. Polaris trades at a rich 18+ times forward earnings and holds an EV/EBITDA of nearly 14 times. Winnebago trades at 14.9 times forward earnings and an EV/EBITDA of 12.25 times. The balance sheet is sparking with zero long-term debt.

Though its precipitous rise may scare off the more price-conscious investors, Winnebago is an industry leader with phenomenal fundamentals. Investors likely won't see the triple-digit gains that the stock posted in the last two years, but the long-term remains very compelling for this business.