Can Investors Win with Winnebago?

Can Investors Win with Winnebago?

Recreation Vehicles are kind of a hybrid between a vehicle and a home. RV enthusiasts use them to get to recreation destinations, and then they serve double duty as lodging upon arrival, negating the need to pay for a hotel room.

A glittering brand now with financial results to match
Winnebago Industries isn't the largest manufacturer of recreation vehicles, but its brand is the most well-known and it has a long-standing reputation for quality, earning the Quality Circle Award from the Recreational Vehicles Dealer Association every year since 1996.

Although the majority of the company's sales come from motor home products, the company is expanding its travel trailer and fifth wheel segment, which accounted for 27% of units delivered to dealers through the third quarter.

The company's third fiscal quarter ending June 1 and year-to-date numbers are outstanding. Revenue was up 40.1% for the quarter and 40.5% year to date compared to the same periods last year. Net income soared 94.4% for the quarter and more than 400% year to date, showing that the turnaround in industry sales didn't take hold until the middle of last year.

The company didn't just move more units of product; it greatly improved operating efficiency. Gross margin for the first nine months increased to 10% from 6.5% last year. This 350 basis point gain brought an additional $20 million to the bottom line. SG&A expense dropped from 5.8% of sales to 5.1%, with the favorable variance coming from selling expenses.

On June 1, the company had an order backlog -- orders from dealers expected to be shipped within the next six months -- of more than 3,000 units, representing potential sales of more than $300 million.

Thor-oughly impressive financial performance
Thor Industries is the largest RV manufacturer in the world, accounting for more than one-third of the total market. In early August, the company released preliminary sales results for its fourth quarter ending July 31 and for the full year; both were record performances.

Sales for the fourth quarter were $1.02 billion, an increase of 15.2% from last year's fourth quarter. Sales of Thor's largest business segment, towable RVs, were up 12.6% to $745 million. Motorized RV sales -- where Winnebago is a major competitor -- rose at an even faster pace, up 55.8% to $168 million.

While percentage-wise these results may not seem as fabulous as Winnebago's, consider that Thor's full-year preliminary sales were $3.7 billion -- a nearly 20% increase from last year -- and Winnebago's total revenue for the first three-quarters of the year were less than $600 million. Thor's revenue increase year over year was $605 million.

Thor has been profitable for more than 30 consecutive years -- even during the industry's darkest times in 2008-2010. This is a cyclical business that somewhat resembles the auto industry. Think about how poorly some of the largest auto companies performed during the recession and compare it to Thor's consistent success.

How about a smaller "recreation vehicle"?
A motorhome or a travel trailer isn't the only vehicle that can take you on adventures. How about heading out on a motorcycle? Harley-Davidson manufactures heavyweight custom, cruiser and touring motorcycles, and motorcycle parts.

In July, this company reported solid results for its second quarter, as well as the first six months of the year. In the second quarter, net income was up nearly 10% to $271.7 million. For the first six months, revenue from motorcycle sales was up 9.4% from the year-earlier period. Six-month net income was $496 million, an increase of more than 18%.

Harley-Davidson continues to make progress with its ongoing cost control efforts. The second quarter gross margin rose one full percentage point to 36.9%. Operating margin was 21.9%, a 2.2 percentage point jump. Operating income from motorcycles and related products was up more than 15% to $357.7 million.

The company is also making significant progress towards its goal of expanding its international business to 150 dealerships by 2014. From 2009 to present, the company has brought on 104 international dealerships. Of the 90,193 new Harley-Davidson motorcycles sold during the quarter, 35% were sold by international dealers.

What we learned
Some of the RV sales we are seeing this year represent purchases that were postponed from prior years due to the Great Recession, the familiar Econ 101 concept of pent-up demand. It's unlikely that Winnebago and Thor can keep growing at 2013's pace, but the industry fundamentals are sound as long as interest rates and gas prices don't spike.

Consumers pay for RVs just as they do automobiles. And in a high gas price environment, a consumer estimating the cost of owning an RV may conclude that his discretionary income is not enough to make it feasible.

Harley-Davidson has restructured its company to be more efficient and achieve higher margins. It is leveraging its iconic brand on a global basis. In addition, the company has done an effective job of marketing to what it terms "outreach" demographics, those beyond its traditional market of white males ages 35 and up. The outreach groups include younger adults, women, African-Americans and Hispanics. These groups in total are three times larger than the company's traditional base.

Yes, investors can certainly win with Winnebago. In my view, Thor might be the best long-term investment, but it's a close race between two industry-leading RV companies gliding down the highway to growth. But watch out for that legendary motorcycle company coming up from behind.

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