Motley Fool Hidden Gems pick Drew Industries (NYSE:DW) reports its fiscal third-quarter 2006 numbers Tuesday afternoon. Before we all head off to enjoy our own two days of recreation, let's take a look at what's been going on at this contributor of parts to the recreational vehicle industry.

What analysts say:

  • Buy, sell, or waffle? Three analysts still follow Drew. Holds outnumber buys 2-to-1.
  • Revenues. On average, analysts estimate sales grew 15% to $195.9 million in the quarter.
  • Earnings. Profits are only thought to have grown 7% to $0.45 per share.

What management says:
Earlier this month, Drew filed a copy of a recent investor presentation with the SEC. Paging through it reveals several items that help to explain why Hidden Gems co-lead analyst Tom Gardner likes the company -- with or without the kind of weather-related windfalls that accrued to the company last year. For one thing, Drew's conservative. When sketching out its past-five-years' growth path for investors, it made a point of excluding both inorganic (i.e. from acquisitions) and Katrina-/FEMA- related sales. It could have kept quiet on both points, but it didn't. Rather, management conservatively argued that it's been able to grow its core business, organically, and still maintain respectable 10% annual revenue and EBITDA growth.

Moreover -- and though this may seem contradictory, it really isn't -- Drew is aggressive. Forty-four years old and counting, the company thinks it still has plenty of room to grow in this industry. In a pair of charts showing that the parts it produces make up $1,100 worth of the average RV, and $1,600 worth of the average manufactured home, Management anticipates that it can, and aims to, roughly double the amount of its content in each type of "vehicle."

What management does:
Drew's margins don't describe an easy story to follow. I'll let them speak for themselves, then explain briefly what's happening here below.

Margins %

3/05

6/05

9/05

12/05

3/06

6/06

Gross

21.7

21.8

21.9

22.5

22.3

22.0

Op.

8.2

8.1

8.4

8.7

8.7

8.7

Net

4.3

4.2

4.5

5.0

5.3

5.2

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
The reason you see no obvious trend of improving or declining profitability above breaks down into two parts: First, business is booming at Drew. It's booming a bit less than it was back when FEMA was buying every towable RV and manufactured home it could get its hands on, but still, 15% sales growth in a declining industry is impressive.

However, margins have been pushed around a lot lately, and by factors that Drew either cannot or elects not to control. For one, the company had to operate less efficiently in order to quickly ramp production to meet the demands of its customers who were, in turn, trying to meet the demands of FEMA, which was in turn trying to meet the needs of tens of thousands of Katrina survivors. Thus, Drew may have sacrificed some profitability in its effort to help out people in need -- there's nothing to criticize in that.

Second, as CFO Fred Zinn described last quarter, Drew has seen raw material costs rise in recent quarters. It has passed those price rises on to its customers, true, but without applying the usual markup to the price-rises so as to preserve its own profit margins. Should that be criticized? I don't think so. On the contrary, I suspect that by "playing nice" with its customers, Drew is storing up goodwill and cementing customer loyalty. Which gives Fools two more reasons to love the company as an investment.

Customers:

  • Berkshire Hathaway (NYSE:BRK-A)
  • Champion (NYSE:CHB)
  • Coachmen (NYSE:COA)
  • Fleetwood (NYSE:FLE)
  • Skyline (NYSE:SKY)
  • Thor (NYSE:THO)

Are you a value investor? A growth investor? Either way, you've got to love a company like Drew, with management that's both conservative and aggressive. We've recommended dozens more companies with attributes like these at Hidden Gems. Read all about them, too, courtesy of a free trial subscription to the newsletter.Click hereto claim yours.

Berkshire Hathaway is an Inside Value recommendation.

Fool contributor Rich Smith does not own shares of any company named above.