Image source: Drew Industries.
Recreational vehicles often gain in popularity when gas prices fall, especially given the high prices of other forms of travel. Drew Industries (DW 5.60%) is set to capitalize on rising popularity in the RV market as a manufacturer of key components for RVs, and it also has some diversification as a maker of manufactured home components as well. Yet RV-industry players like Winnebago (WGO 4.09%) have faced challenges in fully tapping the strength of the market, and coming into Tuesday's third-quarter financial report, Drew Industries investors wanted the company to rebound from a poor report last quarter. Drew's results included solid revenue growth, but investors weren't entirely satisfied with its bottom line. Let's look more closely at Drew Industries and what its latest results mean looking down the road.
Drew Industries keeps moving forward
Drew Industries' third-quarter results were mixed in the eyes of those following the stock. Revenue jumped 17% to $345 million, which was well above the $333 million in sales that most investors expected to see. Net income grew at a more sluggish 12% pace to $17.3 million, and that worked out to earnings of $0.70 per share, which was $0.04 per share less than the consensus forecast.
Drew has been able to foster sales growth through a combination of factors. The key RV segment saw revenue jump 19%, with the company citing acquisitions it has made over the past 12 months as well its distribution and supply agreement with Furrion as adding $23 million to quarterly sales, or about 7 percentage points of the segment's overall growth. A 5% rise in overall industry wholesale shipments of RVs from Winnebago and other manufacturers boosted demand for Drew components, and organic sales increases to related industries and aftermarket sellers also supported the segment's success.
Drew Industries measures its success by how much of the value of each RV and manufactured home is in its products. That figure rose to more than $2,950 for travel trailers and fifth-wheel RVs in the third quarter, up $150 from the year-ago quarter. For motorhome RVs, an even bigger $300 gain sent the figure above the $1,800 mark.
As we've seen in past quarters, though, Drew's manufactured home segment lagged behind its more important RV counterpart. Sales rose just 5% to $32.2 million, sending the segment's overall share of Drew's revenue below 10%. Manufactured home components do carry slightly higher margins than RV components, but Drew Industries hasn't been able to get the industry to match its success in recreational vehicles.
CEO Jason Lippert was happy with how the company did. "Our focus on enhancing the RV user's experience and our extensive product offerings together contributed to our organic sales growth," Lippert said. The CEO also noted its efforts to sell to the aftermarket and to adjacent industries as having paid off in incremental gains.
Are better times ahead for Drew Industries?
Drew appears to be riding that positive momentum into the fall months. October sales were up 11% from the year-ago period, with acquisitions driving about half of that gain.
However, Drew Industries also emphasized the efforts it has made to respond to somewhat slower growth than the RV market saw in the past. As Drew President Scott Mereness noted, "As RV industry growth has slowed from its multi-year double-digit growth pace, higher fixed costs [in facilities and personnel] negative affected our operating margins." In response, Drew has taken action that will cut indirect labor costs by $12 million to $14 million per year, with the hope that the boost to earnings will help the component maker take better advantage of growing sales. Winnebago's recent slowdown in sales growth only highlights the need for Drew to take action to control costs.
An interesting strategic move also came during the quarter. In August, Drew Industries bought Signature Seating, a furniture maker for boat manufacturers. The $16 million acquisition could open up new opportunities for Drew, with the marine market offering at least some diversification from trends in RVs.
Drew Industries still needs to find ways to improve its bottom-line performance in order to make investors happy. Nevertheless, with the company capturing greater sales growth, Drew has the opportunity to refine its operations and squeeze out the margin improvements to give investors the earnings growth they really want.
