Winnebago Just Keeps Cruisin' Along

Soaring gas prices haven't slowed the RV giant, which is getting a big boost from demographic trends in America

By Eric Wahlgren

With gasoline hitting new highs, motorists have been doing plenty of grousing at the pumps. Gas hit a record $1.77 a gallon on Apr. 6, according to the American Automobile Assn. That might have some people thinking twice about buying sport-utility vehicles, which aren't exactly models of fuel efficiency.

The spike in oil costs, however, doesn't seem to be hurting the biggest gas hogs of all: motor homes, which start hitting the road in earnest as the weather warms. The fact that some of these beasts get less than 10 miles per gallon seems to be having no effect on sales.


  On the contrary, recreational vehicles (RVs) are more popular than ever. Orders on hand for Winnebago (WGO ), the No. 1 name in motor homes, jumped 55%, to 2,933, by the end of February, 2004, up from 1,890 at the same time last year. Given how much motor homes cost -- $300,000 or more for top-of-the-line models with solid-wood cabinets and flat-screen plasma TVs -- the price of gas is almost an afterthought.

"Whether you spend 400 bucks more on gas a year isn't going to make or break people who want to see the country in a motor home," says Craig Kennison, an analyst with Robert W. Baird & Co. in Milwaukee.

Demographic changes are giving the business a boost. More than 80% of Winnebago buyers are over age 50 -- and more than 4 million Americans turn 50 every year. RV mania helped drive up Forest City (Iowa)-based Winnebago's share price 75% as revenues reached a record $845.2 million in fiscal 2003, which ended Aug. 31. (Last year's net income, however, fell 9%, to $49 million because of costs associated with opening a new manufacturing facility.) In 2003, the benchmark S&P 500-stock index rose only 26% in comparison.


  This year, analysts expect 46-year-old Winnebago, which sells the Winnebago, Itasca, Rialta, and Ultimate brands, to have another high-octane year. Analysts are forecasting profits to jump 45%, or $1.90 a share, on 21% higher revenue of about $1.03 billion, according to consensus estimates tracked by Thomson First Call.

As of December, 2003, Winnebago had about a 19.5% share of the RV market, according to Statistical Surveys, a Grand Rapids (Mich.)-based firm that tracks RV sales data. Fleetwood Enterprises (FLE ) in Riverside, Calif., had a 17.7% share; Monaco Coach (MNC ) in Coburg, Ore., a 12.8% share; and Thor Industries (THO ) in Jackson Center, Ohio, a 10.3% share.

Winnebago stock did hit a speed bump recently. It's off its 52-week high of $37.88, closing on Apr. 8 at $32.79 (adjusted for a 2-for-1 stock split on Mar. 5). Despite the bright outlook overall, analysts are more muted on the stock in the near term. The main concern is valuation.


  Kennison lowered his rating to neutral from outperform on Feb. 12 after shares closed at $37.01, or close to 20 times his fiscal 2004 profit estimate of $1.87 per share. "That [price-earnings] multiple is close to the peak multiple of the [motor-home] group," says Kennison. "But the fundamentals haven't changed."

Kennison has kept his $38 stock-price target, which suggests it could appreciate nicely over the next 12 months. That's nothing to be ashamed of, but not as impressive as last year's ride. (Kennison's firm may seek investment-banking business from Winnebago within the next three months.)

Analysts have also responded unfavorably to weaker profit margins in Winnebago's second quarter, which ended Feb. 28. The squeeze came in part because certain value-priced RVs made up a bigger proportion of the sales mix in the quarter. "They had some negative margin issues," says Efraim Levy, an analyst with S&P in New York, who has a hold rating on the stock and a $31 price target.

But Levy doesn't see this trend as too worrisome because Winnebago tends to focus on profit over market share. "They're not going to compete on price," says Levy, who has no ties to the company, although other divisions of S&P may.


  Also pressuring the stock has been an unspecified product recall, which led Winnebago to book a charge of 3 cents a share in the second quarter. Guy Nielsen, an analyst with Nutmeg Securities in Wilton, Conn., doesn't expect the recall to have any further effect. "It should be just this one-time charge," says Nielsen, who has no ties to Winnebago. But he only has a neutral rating on the stock as "the price had gotten kind of high."

Winnebago spokeswoman Sheila Davis confirms that the product recall involves only a one-time charge. The company hasn't revealed all the details to Wall Street yet because she says it's waiting for dealers to notify all the owners. "It's really not particularly significant," Davis says.

As for profitability, Davis says Winnebago's operating margin ranges from 9% to 11%, depending on factors such as seasonal demand and product mix. Kennison says Winnebago's profit margin is the strongest in the mobile-home group.


  Several trends bode well for Winnebago, Davis says. Among them, motor-homing is no longer considered strictly for the older set. Buyers as young as 35 are plunking down money for RVs, she says, as the vehicles -- some the size of buses at more than 40 feet long -- are being used to support activities such as snowmobiling or dune-buggy trekking. "We believe there's tremendous growth in the motor-home market going forward," she says.

Given that Winnebago now sells about 12,000 units a year, Kennison notes that it would have to sell motor-homes to only about 1,200 more people each year to achieve 10% growth. That goal wouldn't be too tough to reach, he suggests. "The next decade looks to favor Winnebago."

Another plus, according to Kennison: Winnebago has been out front in innovation. In particular, it has been rolling out more expensive diesel models, as buyers want more horsepower to get their amenities-packed models over mountain passes at national parks and other places where these wide-loads roam. And with Americans anxious about international travel after multiple terrorist attacks abroad, Winnebago -- and its rivals, too -- may continue to benefit from the same sort of stay-closer-to-home trend that took hold after September 11, says Levy.

Of course, if gasoline prices spike too dramatically, Winnebago could start to suffer. But the bigger worry right now is that, given the high multiple its shares carry, the market may be a bit overoptimistic. Many analysts suggest that investors wait for dips in price before parking some Winnebago stock in their portfolios.

Wahlgren covers financial markets for BusinessWeek Online in New York

Edited by Beth Belton

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