Is the nation's largest motor home manufacturer, Winnebago Industries (NYSE:WGO), hitting headwinds? Today, the company is reporting that revenue declined 10%, from $266 million to $239.4 million, and net income fell 9.4% from the same quarter last year.
Ironically, the problem is the inverse of a fate Winnebago suffered not long ago, when an undersupply of vehicles left the company unable to meet demand. Well, times changed, and the company was sporting too much of a good thing since then: Its press release blames recent flagging results on an RV oversupply -- something that can drive down prices in this capital-intensive business. Looking ahead, Winnebago's management says its own dealer inventory is now at an "appropriate" level.
Until this year, Winnebago has been on a roll. Revenue grew from $0.4 billion in 1997 to a record $1.1 billion in 2004. Over the same period, free cash flow -- defined as cash flow from operations minus capital expenditures -- jumped from $2.7 million to a record $62.4 million. On operating measures from return-on-equity to operating margin, Winnebago leads the recreational vehicle (RV) industry.
Winnebago and its top five publicly traded competitors -- Fleetwood (NYSE:FLE), Monaco Coach (NYSE:MNC), Thor (NYSE:THO), Coachmen (NYSE:COA), and National RV (NYSE:NVH) -- sell 80% of their motorized RVs to people 50 and older. The U.S. Census Bureau forecasts this population will grow from 66.1 million in 2005 to 125.6 million in 2050. Demographically, the industry is in the right place at the right time, especially since the 50-and-over crowd controls 77% of the financial wealth in the U.S.
The fact that "RV" was the top search term on eBay (NASDAQ:EBAY) in 2004 is a good indication that the RV business was good then. But how is it now?
Until now, high oil prices have had little effect on the economy. Remember back in 2003 when OPEC was talking about a target range of $22 to $28 per barrel for oil -- and there was widespread concern about the economic impact of much higher prices? Well, oil is in the mid-$50 range now -- and it appears that, for the first time, there are real signs of oil-related consumer pullbacks. It remains to be seen how rising oil prices will affect the RV industry, though.
Winnebago's stock is down 5.8% from a year ago, but it's 27.8% above the low it reached last May. With no debt and a cash hoard of $101 million, the company is extremely strong financially.
If it is true that the industry's supply of RVs is outstripping demand, prices are bound to fall. Winnebago is certainly no exception, so the company will have to keep a close eye on inventory, as well. Add to that the company's lagging sales, and you have two good reasons to be wary as an investor.
Fool contributor W.D. Crotty does not own shares in any of the companies mentioned. Click here to see The Motley Fool's disclosure policy.
