Nice work, Monaco.
Last Tuesday, when previewing the earnings news due out from luxury motor home maker Monaco Coach (NYSE:MNC), I had difficulty finding much good news. Over the last year and a half, the company's margins had been falling on gross, operating, and net levels. Sales had been declining year over year for four straight quarters. Even the chance to produce FEMA-ordered housing for victims of Katrina hadn't provided a significant boost to business.
But what a difference a day made. When Monaco released its first-quarter earnings news, it became apparent that the company has managed to turn things around (for now, at least). Most surprising, though, was the origin of the turnaround. If you recall, I advised that signs of improvement would likely show up first in Monaco's inventories, which had been rising even though sales were falling, or in the company's ability to rein in selling, general, and administrative expenses (SG&A). What I didn't suggest was that sales would spike, or that the company would expand its gross margin.
Joke's on me, I guess. Because those are precisely the two things that Monaco got most right last week, sparking a rise in its stock price. (At last report, it had gained 14%.) Here's what happened last quarter, and what didn't:
- Sales grew 17%, more than twice as good as the 7% growth Wall Street was looking for.
- SG&A continued to outrun sales growth, rising 26%. (Oops.)
- Inventories barely budged, up 3%.
- And perhaps most surprising, cost of goods sold rose only 15%, slower than sales growth. As a result, the company achieved a 12.6% gross margin, up 170 basis points from last year's 10.9%.
In other words, I guessed wrong on every possible catalyst for a Monaco turnaround -- and the company managed to get one started anyway.
I've got good news, and more good news
Further good news came on the firm's cash flow statement, where Monaco reported that both operating cash flow and free cash flow (FCF) nearly doubled versus last year's first quarter. The firm generated $25.4 million in FCF for Q1 2006.
Before you jump to the conclusion that this makes Monaco a "buy," though, a word of caution: It's true that if you annualize Q1's performance, that would suggest upwards of $101 million in FCF for this year, and a price-to-free cash flow ratio of 4. Just remember, though, that Monaco generated less than $29 million in FCF in all of the last four quarters. Until the company proves it can repeat Q1's performance, take these numbers with a grain of salt.
For more Foolish musings on the RV and manufactured housing industry, read:
- Foolish Forecast: Monaco Rolls In
- Foolish Forecast: Coachmen Rings Once
- Winnebago's Bumpy Road
- Foolish Forecast: Cavalier Stable
- Foolish Forecast: Drew Draws
Drew Industries has been singled out by our Hidden Gems newsletter service.
Contributor Rich Smith does not own shares of any company named above.
