Investors appear to be questioning the sustainability of the Winnebago industry (NYSE: WGO) revenue and operating margin growth. Winnebago’s TTM revenue is roughly double its pre-pandemic level, and Winnebago’s operating margin was at one point 4-5% higher than it was in 2017-2019.However, I believe most of the Winnebago The growth in revenue and operating margin is permanent. My point is that the market is undervaluing Winnebago’s future revenue and operating margins, which creates an opportunity for investors to earn ~18% annualized returns over the next few years.
Winnebago started out in the RV business, but moved into the towable RV business in the 2010s. Trailer trailers are growing in popularity, presumably because they’re smaller, cheaper, and easier to maintain.
Winnebago acquired Grand Design, a towable RV company, in 2016, causing its revenue to more than double from 2016 to 2018.Additionally, Winnebago enters the boating industry with the acquisition of Chris-Craft 2018 is, Barletta is 2021. Winnebago also acquired Newmar (an RV business) in 2019 and recently announced that it will acquire Lithionics (a battery company), but I don’t think these acquisitions are significant. Using normalized numbers, about 10 percent of Winnebago’s revenue comes from Barletta and Chris-Craft, while 90 percent of Winnebago’s revenue comes from RVs.
Between 1980 and 2024, RV shipments will grow by only 2.42% per year. Despite the industry’s maturity, I believe Winnebago’s underlying growth over the past few years has been much higher than the rate of economic growth for several reasons.
long term growth
The pandemic has accelerated the growth of the RV industry given the increasing penetration of RV households. On Winnebago’s third-quarter conference call, management noted that people are using campers as a more affordable alternative to hotels. Additionally, 52 percent of Winnebago Industries’ third annual Spotlight survey respondents said they would increase outdoor activities to reduce stress (up from 2022 results). First-time buyers are also at record levels, so overall awareness and acceptance of RVs has increased.
market share growth
Thanks to its Grand Design brand, Winnebago posted impressive market share gains in the travel trailer and fifth wheel segment from 2018 to 2021. Although Winnebago has lost market share since 2021 (due to management’s caution and reduced on-site inventory), management expects Winnebago’s market share to reach 15% over time.
favorable product mix
Winnebago’s acquisitions of Grand Design in 2016, Chris-Craft in 2018, and Barletta in 2021 have resulted in significant margin growth as towable motorhomes (Grand Design) and boats (Chris- Craft and Barletta) are products with higher profit margins than RVs. I believe margins will continue to expand as Winnebago’s Grand Design brand (the towable segment) will likely experience more potential growth than Winnebago’s RV segment for two reasons:
- RVs account for a smaller percentage of annual RV shipments
- Despite a 16% decline in industry RV shipments in 2019, revenue in the towable segment was flat in 2019 (which I believe represents strong organic growth)
While the RV market has grown at an incredible rate over the past four years, I believe this growth is a one-off as it is being driven by price increases rather than volume growth. Going forward, I expect tractor sales to grow faster than RV sales.
sticky price hike
After Winnebago acquired Grand Design in 2016, the tractor average selling price (ASP) increased significantly. Tractor ASPs are currently approximately 40% above 2019 levels, while RV ASPs are approximately 95% above 2019 levels. However, I think these price increases are sustainable for the following reasons:
- Winnebago’s 2019 acquisition of Newmar drives ASP growth in 2020 (Newmar is a luxury brand)
- The RV industry is an oligopoly as Winnebago, THOR Industries and Forest River account for 90% of sales. Winnebago management stated that they are reactive in pricing (industry pricing based on THOR/Forest River).This means THOR/Forest River can keep prices high, pass on cost increases to consumers, and maintain high gross margins
- Although sales volumes have declined in recent quarters, average selling prices remain high. Additionally, there is plenty of evidence to support volume growth in the coming quarters. RV sales in 2024 Estimates of RVIA Above 2023 RV sales estimates, management indicated that the demand environment should strengthen, they said“We’ll be approaching a point over the next six months, particularly in the RV business, where most, if not all, of dealer destocking needs will likely be met”
- manage Supporting higher ASPs in the recent call, they forecast gross margins to eventually reach 19% (a record level)
Winnebago looks cheap compared to THOR Industries (the company most similar to Winnebago), which trades at nearly 15 times 2024 consensus earnings. Both companies have similar growth (EPS growth), risk (beta), and capital efficiency (return on equity), so I think they should trade more closely. The long-short trade looks interesting given the multiple differential.
Base Year Income: I estimated Winnebago standardized shipping division revenue based on MasterCraft revenue (I couldn’t find pre-COVID shipping division revenue). Revenue for the tractor and motorhome segment is calculated by multiplying average selling price by sales volume. My estimated average selling price and volume are as follows.
Shipments Peaking in 2021, approximately 30% above the best-fit index line in 2024. I normalized the shipping volume by reducing the peak units sold by each segment by 30% (RV sales peaked within 22 feet, trailer sales peaked within 21 feet).
price unit: I think in my bear case, that number is roughly back to historical averages. In my bull case, I see this number still high for motorhomes and towables, but slightly down from current levels due to unfavorable near-term conditions.
Maritime Revenue and Bear Scenario EBIT Margin: To adjust for increased revenue due to COVID-19, I multiplied MasterCraft’s (2019 revenue)/(2022 revenue) ratio by Barletta’s and ChrisCraft’s 2022 revenue. I also applied the (2019 EBIT margin)/(2022 EBIT margin) ratio to estimate Barletta & ChrisCraft’s normal-case operating margin.
EBIT margin (bullish): I set management’s gross margin target at 19% from the start. From 2017-2019, Winnebago’s gross margin was 7.51% higher than its EBIT margin, so I subtracted 7.51% from 19% to get 11.49%.
EBIT margin (bear market scenario): Weighted average EBIT margins are based on normalized revenue and operating margins for each division. EBIT margins for the tractor and motorhome segments are based on historical averages (tractor: 2017-2019; motorhome: 2015-2019). Management only provided EBITDA margins for each segment, but historically D&A is about 1% of revenue, so I subtract 1% from the average EBITDA margin to get the EBIT margin.
Weighted Average Cost of Capital (WACC): Capital Asset Pricing Model; Aswath Damodaran’s implied ERP of 4.9%; BB credit default spread adds risk-free rate to cost of debt; 5-year historical beta.
invest again: (Change in revenue for next year)/(Sales/(Invested capital)). The sales/IC (invested capital) ratio is constant because I assume capital efficiency remains constant.
Terminal ROI: That’s 5 percent higher than Winnebago’s WACC. I make this assumption because the oligopolistic nature of the industry should allow companies to earn more than their WACC on new projects.
Terminal g: Risk-free rate (a proxy for economic growth rate)
Terminal Reinvestment Rate (RIR): (terminal g)/(terminal ROIC)
end value: ((EBIT*(1-(Tax Rate))*(1-(Terminal RIR))*(1+g)))/(WACC-(Terminal g))
Analysts Estimate DCF
Analysts’ revenue estimates are much more optimistic than mine, but their operating margin estimates fall somewhere between my bearish and bullish assumptions.
I believe each case is equally likely, so I weight each case equally.
In theory, if priced correctly, the company’s value should increase its cost of equity each year. Winnebago’s cost of equity is 12.5%, so if Winnebago’s fair value is $86.32 per share, it will be worth $155 in five years’ time (an increase in equity value of 12.54% per year). If the market values Winnebago at $155 per share five years from now, Winnebago shareholders will earn 18.5% annually.
The obvious risks are macro. Winnebago’s revenues fell more than 80% from their peak in 2004 to approximately $200 million in 2009 (due to the global financial crisis). However, I would like to counter this risk by pointing out that the entire stock market is priced for a soft landing/no landing (S&P 500 at 4500, S&P top-down analysts expect strong earnings growth in 2024, 2025).
Macro risk can also be minimized by shorting THOR Industries. As I noted before, Thor Industries looks expensive at current levels.
To me, Winnebago looks very attractive at its current level. I suspect that as conditions normalize, investors will start looking at higher operating profits and higher revenues. While I’m not as bullish as the market, I still expect high double-digit returns over the next few years, as Winnebago looks undervalued and has a high cost of equity.