It's spring break around the U.S., and for some folks, it's time to hit the open road in the family RV. That means things should start to heat up in the seasonally strong spring selling period for Winnebago Industries
The second-quarter results Winnebago released March 16 were nothing to write home about. Earnings for the quarter fell nearly 40%, while revenues dropped nearly 14%. For the six months ended Feb. 25, earnings were down almost 31%, with sales down slightly more than 13%.
Management attributed weakness to "decreased industry retail demand" in what is generally the slowest quarter before sales pick up in the spring. High gas prices and reduced consumer confidence also contributed to the recent downturn. Macroeconomic events don't generally have a direct impact on most companies' results. But for Winnebago and recreational-vehicle companies in general, these factors, as well as interest rates, affect buyer behavior for motor homes that cost $90,000 on average.
However, Foolish investors tend to take a longer-term view of companies and their operations, using short-term fluctuations as potential entry points into a stock. In this light, Winnebago looks considerably more appealing; it's currently on the Motley Fool Hidden Gems Watch List. Among its positive qualities, the company:
- Is extremely well run, with a solid long-term track record of profitability
- Has strong returns on equity and capital (both near 30% over the past four years)
- Has no long-term debt outstanding
- Generates consistently high levels of cash flow from operations (CFO) and subsequent free cash flow (capital expenditures minus CFO).
One of my favorite techniques is to analyze the relationship between net income and cash flow. For Winnebago, you'll find that net income is a good proxy for free cash flow as a sign of quality earnings.
Winnebago leads RV makers in market share, and demographic trends are in the company's favor, as baby boomers retire and purchase RVs to explore the country. These boomers are the industry's target market, a group that's expected to grow in the double digits going forward. In addition, there is little foreign competition, since the RV industry is mostly U.S.-based.
Winnebago's stock currently trades at roughly 17 times trailing earnings. Employing a two-stage implied earnings model, I estimate that Winnebago needs to grow about 12% annually for the next 10 years to justify the current stock price. (Major inputs include a 3% terminal growth rate and a 12% cost of capital.) If we assume that it will take another ten years for growth to ramp down to the terminal rate, then the stock could be worth as much as 20% more than the current price. As with any model, it's useful to do a sensitivity analysis, but a fair-value range of $30-$38 appears reasonable. The stock occasionally dips below $30 (as it did briefly after the earnings release); a buying opportunity might present itself below this level.
Overall, Winnebago is well-run and has long-term demographics on its side. Along the way, it will be tripped up by economic cycles and subsequent interest rate fluctuations, high gas prices, seasonal buyers, and fickle consumer sentiment. But as any Fool knows, these uncontrollable outside events provide the necessary entry points and margin of safety investors need to gain exposure to appealing opportunities.
Winnebago's conservative management style has allowed it to make money in any operating environment. Sure, it won't participate as much in an up cycle, since debt tends to magnify upside exposure. It may also be hit a bit more in a down cycle, since it refuses to offer incentives and sacrifice profitability. All the same, the company seems poised to let long-term investors rest easy, enjoying the ride toward positive returns.
Fool contributor Ryan Fuhrmann has no financial interest in any stocks mentioned (that means he's neither long nor short the shares). Feel free to email him for feedback on this article or to discuss Winnebago further.