Are There Risks that Could Keep Winnebago From Enjoying a Smooth Ride?
Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Winnebago Industries, Inc. (NYSE: WGO) has long been one of the premier brands in the recreational vehicle -- RV -- market. Now, I’ll admit to having preconceived notions about the whole RV culture. I imagined a dreary trailer park experience where your neighbors Bubba Ray and Doreen are parked two feet away, play country western music from the 1980’s, and keep inviting you over for “brewskis” and grilled hot dogs. But late last year a friend of mine invited me to go to a large RV show in Phoenix, Arizona, held at the beautiful stadium that is the site of the NFL Arizona Cardinals’ many exciting losses.
There I learned that my notions were completely wrong. The demographics of RV enthusiasts are not only much broader than I imagined, but considerably more upscale. Today’s motor homes and travel trailers are beautifully furnished and comfortable. Think of them as tiny, luxurious New York apartments with the latest high-tech electronics but much more reasonable rent.
So after spending a day at the RV show looking at the product offerings of Winnebago and one of its major competitors, Thor Industries Inc. (NYSE: THO), as well as talking to customers, I felt pretty positive about this industry’s outlook. The buoyant stock market makes people feel wealthier and more confident about making big ticket purchases. Interest rates are low, which makes financing an RV less costly. The summer travel season is rapidly approaching, which is the prime time for RV sales. A longer term positive factor is the gradual aging of the US population. Retirees are still an important market for companies like Winnebago.
But as we know, the road to profitability is filled with potholes. And Winnebago, in its 10-K, provides us with a description of some of the risk factors it faces.
Winnebago cites the strength and size of competitors as a risk, particularly in the towable RV market, which include travel trailers and fifth wheels. Thor Industries, for example, is a large competitor in that sector. It’s worth noting that Warren Buffett is a participant in this industry. Berkshire Hathaway Inc. owns Forest River Inc., another well respected RV manufacturer. From Winnebago’s standpoint competitive factors include innovations by these companies that result in superior product offerings, greater purchasing power that brings about lower manufacturing costs, and the brand awareness these companies have earned. Winnebago might be guilty of being a bit modest here: on Feb. 14, Statistical Surveys, Inc., a retail reporting service, named Winnebago the top performing motorhome manufacturer. During calendar year 2012, the company had both the largest volume and the largest overall growth in motorhome retail registrations.
Reliance on a Few Dealers and Suppliers
In 2012 one of Winnebago’s dealers accounted for more than one-quarter of the company’s revenues. The loss of a dealer this size could of course be a major blow to sales prospects. On the parts supply side, Winnebago uses chassis built by Ford Motor Company and two other suppliers. The risk is that production delays or work stoppages at these suppliers could cause an interruption of Winnebago’s production schedule as well. Chassis suppliers use an allocation system during periods of short supply, based on the volume of chassis purchased in the past. So Winnebago has to keep an eye on how Ford’s operations are going, as well as on the demand for their own products.
The availability and cost of credit affects Winnebago in two ways. Its dealers finance the inventory they have on their lots, and customers often finance the purchase of RVs. The current low interest rate environment is beneficial for both dealers and customers. But tighter or more expensive credit can be a major negative factor. RVs are not inexpensive purchases--upper-end models can cost $100-$200K, or more.
Big jumps in fuel prices and fuel shortages have been devastating to this industry in the past. Savvy prospective RV purchasers calculate the total cost of operating the vehicle, including fuel, maintenance and interest on any loans they took out to buy it. The worst case scenario would be a combination of rising interest rates and rising fuel prices. Remember those fabulous 1970’s?
If you are convinced the signs of economic recovery are genuine, then these risks should not be too daunting.
Investor Discomfort Scale: 5 means Significant Fretting, and 1 means Absolute Bliss
Winnebago should earn a 2.5
And in these times, any company whose products provide Americans with greater freedom -- even if it’s just the freedom to explore -- is a company worth rooting for.
Brian Hill has no position in any stocks mentioned. The Motley Fool recommends Ford. The Motley Fool owns shares of Ford and Winnebago Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!