Considering how bad its news was, Motley Fool Hidden Gems pick Drew Industries (NYSE:DW) has encountered a remarkably mild response on Wall Street. After reporting earnings results that fell far short of what the Wise expected, and what the RV components maker itself had accomplished last year, the stock fell immediately, and continued to drop over the ensuing days. But at last count, it was only down 4%.
Not bad for a firm that:
- Reported a year-over-year sales increase of just 6%, half of which came from acquisitions, and less than half what investors expected.
- Reported a 29% decline in profits to $0.32 per share, where Wall Street had predicted an increase.
- Summed up the year to date by noting that profits have increased at just half the clip of sales growth year over year (10% vs. 21%).
- Opined that "industrywide production of RVs and manufactured homes" -- the firm's bread-and-butter customers -- is on the decline.
Clearly, therefore, investors found some reason to believe that the third quarter's news was not the whole story at Drew. What might the real story be?
For one thing, it's a story of a firm that maintains the power to increase its prices enough to produce $12 million in additional revenue -- accounting for all of the sales increase this quarter and then some. For another, it's the story of a company that is "negotiating lower prices for purchased components, and continuing to increase sales volume." Lower input costs, when combined with the aforementioned price increases, promise an eventual reversal of the "lower-than-expected margins" that CEO Leigh Abrams lamented last week.
How eventual? According to Abrams, we're probably looking at a soft retail environment for RVs and manufactured homes for another six months. Although six weeks would have been preferable, most investors -- even on Wall Street -- are capable of thinking forward a couple of quarters and sitting tight on their shares in hope of a rebound.
As for the basis for this assertion of a coming rebound, here's how Abrams described his thinking. RV sales (70% of Drew's business) have declined largely because of rising interest rates and higher gas prices (as Monaco (NYSE:MNC), Thor (NYSE:THO), Winnebago (NYSE:WGO), and Fleetwood (NYSE:FLE) will attest). Abrams posits that today's stabilized rates and lower gas prices will eventually bring buyers back to the RV market.
Once they get here, Abrams says they will discover that "RV dealers have recently been aggressively reducing their inventories." This will create demand for new RVs, which will benefit Drew as it sells the parts needed to make those new vehicles. Abrams further cited the dearth of used RVs on the market as evidence that people have been holding onto their current vehicles; prospective buyers should be itching to trade them in for new models soon.
From this Fool's perspective, it all sounds perfectly logical. That what can only be described as a massive earnings miss had so little effect on the stock price suggests that Wall Street agrees.
To clarify a question I'm often asked, the preceding content -- and generally speaking, all content presented on this Fool.com page -- does not necessarily represent the "official" thinking among our Motley Fool Hidden Gems analysts. To learn what they're thinking, all you have to do is click here, and read what Gems analyst Jim Gillies had to say about Drew's report. Not a Gems member? Heck, just sign up for a free trial.
Fool contributor Rich Smith does not own shares of any company named above. The Fool has a disclosure policy.
