Editor’s Note: The investment firm of Robert W. Baird & Co. issued a client advisory following its fourth quarter survey of 106 RV dealers across the nation. Excerpts from the newsletter follow.
Fundamentals look solid, but OK to harvest gains. In partnership with the Recreation Vehicle Dealers Association (RVDA), we contacted 106 RV dealers to assess recent trends. It’s the off-season, but trends were generally favorable. Fundamentally, consumer demand is improving as negative RV equity evaporates, stimulating trade-in activity. Meanwhile, after an extended destocking period, inventory is lean-to-balanced and dealer confidence is building – supporting strong orders. We remain bullish on fundamentals, but would trim into strength on valuation.
Retail continues to improve. Dealers reported growth in motorhomes (+2-4%) and towables (+12-14%) during the seasonally less-important December quarter. We believe better consumer confidence and improving used RV values are supporting stronger demand. Retail data from Statistical Surveys Inc. (SSI) indicate motorhome demand improved 3% in October, while towable demand increased 8%.
Sentiment soaring. Dealer sentiment remains quite strong. Dealers that survived the recession by slashing inventory and running a lean cost structure see potential for better days as retail recovers. Improved sentiment is driving incremental wholesale demand, fueling the early stages a re-stocking effect in which wholesale shipments exceed retail sales. The trend could persist for a while, in our view.
Inventory appears lean to balanced. Dealers report 125 days of towable inventory (up from 121 days last year) and 88 days of motorhome inventory (down from 118). As dealer sentiment rises, dealers have become more confident stocking in anticipation of better demand. Still, it’s the offseason for many dealers – the percentage of dealers expressing concern about the level of inventory increased. Relative to our coverage, we consider Thor inventory “balanced” and Winnebago inventory “lean.”
Outlook. We are bullish on RV fundamentals as demand improves. We believe improving values in big-ticket items may reinflate a wealth effect for more consumers. Meanwhile, dealer inventory appears lean to balanced, supporting a modest re-stocking effect before a bubble builds. Still, with Winnebago shares up 77% and Thor shares up 45% since July 1, we advise investors to trim positions – especially given difficult spring comparisons (recall that spring arrived early in 2012). Longer term, we are concerned that deficit spending and tax policy will lead to recession – but a wealth effect and restocking effect suggest trends will get better before getting worse.
Winnebago. We are adjusting our estimates to better reflect production capacity, raising our F2013 estimate to $0.85 and our F2014 estimate to $1.00. We are also raising our price target to $20.