As the price of airfares, hotels, and other traditional travel amenities rise inexorably, many families have turned to recreational vehicles as a way to meet their travel needs while economizing to fit their budgets. Drew Industries (NYSE:LCII) makes many of the components that go into RVs as well as manufactured homes, and it has benefited from greater demand recently. Going into Tuesday morning's second-quarter financial report, Drew Industries investors had high hopes that the company would be able to sustain its ambitious growth path, but as it turned out, the results that the components-maker posted fell somewhat short of investor expectations. Let's take a closer look at how Drew Industries fared this quarter and what's ahead for the company going forward.
Drew Industries rolls a little slower
Drew Industries' second-quarter results still showed that the RV industry is doing fairly well. Sales climbed 13% to $362 million, just barely hitting a new record by $1 million over the first quarter but falling short of the 17% sales growth that investors had wanted to see. On the bottom line, Drew Industries weighed in with net income of $20.9 million, but its earnings of $0.85 per share couldn't match up to the consensus forecast for $0.93 per share, reversing last quarter's earnings beat.
Once again, a closer examination of Drew Industries shows how essential the RV segment is to its overall business. Sales for the RV unit rose 14%, with Drew noting that the gains were impressive given the acceleration in RV production at the wholesale level late in 2014 and early this year. Drew's acquisitions helped add about six percentage points of growth, and the company also cited higher shipments of travel-trailer and fifth-wheel RVs along with organic growth.
In particular, the strongest sources of revenue growth came from travel-trailer and fifth-wheel vehicles, adding nearly $60 million to Drew's top line. Drew also took greater advantage of the RV aftermarket, with the segment seeing sales more than double to $38.7 million, and sales to adjacent industries jumped nearly by half. Drew now makes about $2,925 worth of components for every travel trailer and fifth-wheel RV produced in the industry, up by more than $150 from the year-ago figure, and growth of more than $400 for every motorhome RV to climb above the $1,725 mark is even more impressive.
By contrast, Drew's manufactured housing segment continued to underperform. The segment saw a slight sales decline of nearly 2% to $57.4 million, but operating profits did manage to climb by 16%, outpacing its larger RV counterpart on bottom-line growth. Nevertheless, with the segment representing such a small part of Drew's overall operations, the components-maker remains largely reliant on RV-related products for its success.
CEO Jason Lippert again expressed confidence about the company's results. "RV industry fundamentals remain strong," Lippert said, "as evidenced by the 12% increase in industrywide retail sales of travel trailer and fifth-wheel RVs in the first five months of 2015." Lippert noted that some production ended up getting pulled into previous quarters, which explained some of the sales shortfall that Drew experienced. Nevertheless, retail sales have been strong, supporting Drew's long-term growth.
What's coming down the road for Drew Industries?
Lippert also believes that the RV industry will remain strong. "Most industry analysts are reporting that RV dealer inventory is in line with anticipated retail demand," Lippert said, "and we are optimistic that RV dealers will place strong orders following the annual Open House" in September.
Early results for July also confirmed the continued strength of RV demand. Drew reported that July sales climbed 11% to $112 million, with acquisitions responsible for about half of those gains.
Looking forward, Drew Industries expects its past investments in capacity expansion to pay off. Although the company incurred substantial fixed costs in bulking up its production facilities and hiring new workers to meet higher demand, Drew believes that the negative impact on short-term margins will be temporary and eventually reverse itself as the company takes advantage of favorable industry conditions. Similarly, efforts to improve marketing, customer service, engineering, and internal divisions at the company should result in greater productivity and a better experience for Drew's clients.
The company also discussed its new supply agreement with Furrion Limited, which provides high-tech RV solutions that include video and sound systems, navigation systems, wireless backup cameras, and solar prep units. With Furrion's reputation as an innovator, the agreement should ensure that Drew can take full advantage of new products for years to come.
Traders in Drew Industries might not be happy with the short-term shortfall in the company's quarterly results. For long-term investors, though, Drew's progress continues unhalted and could help the company enjoy even faster growth in the years to come.