Winnebago Industries – Taking A Holiday Here

Winnebago Industries – Taking A Holiday Here

Winnebago Industries (WGO) has been on my watch list for a long time and has been part of my portfolio at various occasions in the past. Last September, I concluded in this premium article that it was time to take a long term trip.

What followed have been very volatile conditions of course as after an initial move lower in response to the outbreak of the Covid-19 crisis, it turns out that current developments might actually benefit the company a great deal, at least in the short term.

The Thesis

Last September I observed that the company was doing relatively well in a challenging market, as sales were resilient and the company was able to maintain margins. That was important after the company acquired Newmar $344 million at the time, thereby getting more exposure to premium RVs. With $661 million in sales and $55 million in EBITDA, I noted that multiples looked quite compelling, certainly as some synergies were anticipated as well.

As the company has a broken book year, the results for 2019 were not yet in when I looked at the shares at the time. In October 2018, the company reported record annual results with revenues of $2.0 billion, operating margins around 8% and earnings of $3.22 per share. Shares fell to $20 late 2018 as investors feared cycle ending, sales falling, but moreover a decline in margins. As it played out in 2019 the company did see some modest sales declines and a bit of margin pressure, yet $2 billion in sales and earnings of $3 per share should be possible, as the company showed real resilience.

Based on that outlook, shares trading at $37 and leverage standing at around 2 times EBITDA, valuation looked reasonable. This is certainly the case as I noted that there was a real runway for earnings to come in around $4 per share following the deal for Newmar, reducing forward multiples to about 10 times. That said, it should be noted that the company was arguably still enjoying better than average margins than could perhaps reasonably expected over the cycle. Liking the deal and relative performance, yet recognizing that shares jumped 20% already when I looked at the shares this past September, I concluded to start buying into dips around $35 or lower.

Shares actually hit the $35 mark later that month prompting me to initiate a quarter of my desired position, before they gradually rallied higher in the second half of the year.

What Happened?

Having only initiated a small portion of my targeted position in September, shares enjoyed a good news rally as reported earnings came in at $3.52 per share for the year, a thirty cent improvement on flattish sales of $2.0 billion. Margins were actually down a slight amount, yet earnings growth was driven by lower tax rates. The company furthermore reported 12% organic growth for the quarter, with adjusted earnings up slightly, although some margin pressure was observed. These results pushed shares up to $50 around the turn of the year and $60 in February, marking 70% returns in less than half a year.

Shares dropped from $60 to $20 in the time frame of just a few weeks as RVs are not only expensive, they are far from an essential good, at least that was the initial reaction during the outbreak of Covid-19. The company reported second quarter results amidst the crisis with organic growth seen at 13% and adjusted earnings up as well, yet investors were fearful about the future of course, as net debt was reduced to $340 million.

On top of taking the obvious measures such as halting production and saving costs, investors were beginning to become more upbeat as shares recovered to $60 late May, thereby tripled from the lows mid-March. Shares even hit the $70 mark, marking fresh all-time highs late June, before now trading around $65 per share.

Green Shoots, Soon After Covid-19

Late June, much awaited third quarter results were released. Very important to realize is that the quarter ended on May 30, which basically meant that the Covid-19 situation impacted almost the entire quarter. Sales fell 24% to $402 million which looks better than it is, as the company of course acquired Newmar which generated $88 million in sales for the quarter, while no contribution was seen this period last year. Adjusted for that deal, sales fell about 40% on an annual basis.

Gross profit margins were cut in half to 8% in sales as the company saw deleverage on the S,G&A expense base as well. Hence, Winnebago saw operating margins of 9.3% turn into losses of 2.0%, for an operating loss of $8.2 million. Losses are always a serious issue, certainly as the company still torches along a net debt load of around $300 million, but the extent of the losses in this environment seem reasonable.

Comforting is that the company has seen a strong rebound in May, and this trend has been seen in June as well. More leisure time, spending more time outdoors and not being to travel all benefits the company greatly. The company did not only call for a recovery but strong upward trajectory in demand as well. The company mentioned on the conference call that March saw a 20% decline in retail sales, followed by 53% decline in April and ever since continued improvements, with positive comps seen in June, though not quantified.

This means that the company, absence of this dismal quarter, could be on track to report similar or higher earnings than the $3.50 per share reported last year, really supporting the $4 earnings per share roadmap. Obviously shares jumped from $20 to $65, making that based on $4 in earnings per share, shares trade around a market multiple as investors seem to be extrapolating positive sales growth in recent weeks.

On the other hand is the inherent volatility expected this summer in terms of real consumer demand, as economic reality might kick in at some point, and/or worse another real Covid-19 breakout could occur as it is very evident by now that the situation is far from under control.

Actually still sitting on the small position initiated last September, of which I paid little attention, I decided that last week’s action provided a great opportunity to sell-out of my position. I view this truly as a gift of the market to take some profits with the risk-reward of the shares now not looking very compelling.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.