Winnebago: A High quality Outside Recreation Play (NYSE:WGO)

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Winnebago Industries, Inc. (NYSE:WGO) is a leading North American manufacturer of recreational vehicle (RV) and marine products designed to support outdoor recreation. The stock has recently performed worse than the market as a whole. However, I think there is a lot fallen to WGO. The business qualities cannot be ignored. Here I will share some of my thoughts.

Data from YCharts

Great growth momentum

WGO has experienced rapid growth over the past decade. Through organic growth and acquisitions, WGO has grown its revenue by a surprising 20% ​​CAGR over the past decade. This is no easy feat for a company that makes physically built products like RVs and boats. Google’s (GOOG) (GOOGL) CAGR is only 18% over the past decade. The chart below shows that WGO has outperformed its peers in terms of revenue and EBITDA. Current 12-month revenue is 4.3B compared to 0.97B for FY2015. EBITDA increased even further from 60M in 2015 to current 12-month EBITA of 545M . at.

diagramData from YCharts

While some of the revenue growth may be due to seasonal or macroeconomic tailwinds, WGO is actually winning the industry competition. As the chart below shows, it has increased its 3-month trailing RV share from 2.9% in 2015 to its current 12.6%.

Market share of F22 motorhomes

Market share of F22 motorhomes (Presentation 2022 Q2)

Focus on quality, innovation and service

WGO’s success stems from long term investments in its motorhome expertise and brand heritage as it is best known in the industry for its quality, innovation and service. All WGO motorhome brands have been awarded the RVDA quality circle prize in 2021 (a big comeback since 2015). According to 2021 10-K, WGO products have often commanded a price premium due to their good reputation. The US made just 600,000 RVs last year. Compared to consumer vehicle production (Ford, GM, Toyota), RV manufacturing requires a lot of human labor and doesn’t have the scope for automation and standardization. The total number of production units is small while the total number of components included in a motor home is very high. Therefore, all RVs will have problems here and there, quality control is not easy. WGO requires all vehicles to undergo shock and stress testing prior to sale. The company operates the world’s largest RV factory and makes its own metal, plastic and wood parts. A lot of the furniture, seats and mattresses are made in-house, which offers better quality control. The specially designed steel SuperStructure (photo below) uses interlocking joints (instead of screws and glue) to connect the floor, side panels and roof and mount equipment and cabinets.

WHO superstructure

WHO superstructure (Lightsense RV blog)

Margin improvements and brand awareness

During fiscal 2016, WGO invested in its manufacturing and supply chain capabilities to transform the company into a larger, more balanced and profitable company. Five years later, the company is in much better shape with the acquisitions of Grand Design, Chris Craft, Newmar and Barletta, bringing synergistic benefits on a larger scale. Gross margins have improved to 18.59%, outperforming RV giant Thor Industries (THO).

diagramData from YCharts

Improving WGO’s profitability and efficiency is also reflected in the trend of ROICs, days of inventory and revenue per employee (chart below).

diagramData from YCharts

In terms of brand awareness, WGO previously had branding issues with younger customers during their 2016 assessment. Millennials are now buying WGO RVs as WGO sees record sales from millennials, with around 10% of buyers now aged 30 or younger. The average age of customers has also fallen significantly.

sustainability and recession immunity

RVs are not considered essential. RV sales go up when the overall economy is good and people have extra cash. RV sales decline amid recessionary conditions and slow or negative rates of economic growth. The RV business is always subject to volatility. The current level of sales and earnings can no longer be maintained in the future. This explained why WGO and THO have had low PE ratings of around 15x in recent years, despite the benign market sentiment and monetary policy.

diagramData from YCharts

From 2022, an inflationary environment is likely to have a negative impact on WGO’s performance. However, CEO Michael Happe is convinced of the company’s pricing power:

So we will continue to monitor that. We believe we have pricing power in the market. We will first seek to offset inflationary pressures through cost-cutting or cost-avoidance initiatives, and we will continue to price to the extent that we need to, with the goal of maintaining margin, not just dollar per unit, but margin per Unit. That has been our stance in the past and will continue to be so.

He believes the current WGO is in a very different position than it was in 2008 or 2018 as the WGO is more disciplined, informed about the market and has a more resilient product mix. WGO is expected to deliver a double-digit adjusted EBITDA return in the future, no matter the conditions. The good news is that market downturns typically last 6 to 24 months and industry shipping keeps bouncing back to new record highs, as shown in the chart below. In the long term, the motorhome industry will continue to grow. Three big players, WGO, Thor and Forest River should gain more shares over time with stronger positions after the ups and downs.

RV shipping

RV shipping (www.rvia.org/historical-rv-data)

Assessment and Risks

With $4.3B in revenue, $0.34B in net income, $0.09B in free cash flow and $1.2B in equity, WGO’s current market cap of $1.78B is reasonable by all traditional valuation metrics (PE, PS, PB, cash flow yield) already very cheap. The remaining buyback plan of 0.15 billion also provides security for the share price. We believe the WGO pandemic has provided unusual tailwinds and current gains may not be sustainable. To be conservative, we’ll use the average of current TTM and 2019 earnings of $0.225B as a starting point. If we set the future growth rate to follow the headline GDP rate of 3% and a discount rate of 7%, WGO should be able to produce a 10-year discounted earnings of 1.83. Considering the current market cap of $1.78 billion and conservative assumptions, this is a very good return.

With a long-term horizon, I think the macro risk is rather low. Yes, hyperinflation and recession can come. But the megatrends of demographic aging and outdoor living should give WHO a boost. In addition, the housing shortage will continue for the foreseeable future, which could also benefit demand from RVs for outdoor activities. A major concern for me is future competitive and investment risks. Once built, RVs are subject to significant depreciation (27% after three years). If the company fails to manage inventory levels or build capacity too quickly, shareholder returns will be eroded.

Conclusion

Overall, WGO offers investors great added value. Although there are short-term headwinds, the long-term risks are very limited. Humans have an innate need to explore nature and the physical world. United States visits to state and national parks continue to increase. There is no question that the demand for outdoor living will continue into the future and WGO will play a big part in that.