Put the Key in the Ignition

 | Apr 19, 2013 | 4:30 PM EDT  | Comments
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tho

In mid-April, we saw an interesting insider purchase over at motor-home maker Winnebago (WGO). On the heels of an 87% Winnebago stock surge over the prior year, board member Mark Schroepfer picked up 4,000 shares -- half at about $18 and the other half near $17.50. This piques our interest, because names bought by insiders tend to slightly outperform the market -- which we believe is because insider buying indicates high confidence in the company, since it entails ratcheting up company-specific risk.

Winnebago's fiscal second-quarter sales (ended February) climbed 35% and, from the start of the year, sales were tracking 41% higher overall. With little change in operating expenses, the company reported a $6.3 million second-quarter profit -- up from a small loss a year earlier -- and income of slightly under $14 million for the first half. That comes out to $0.48 per share, and annualizing that figure gives us a price-to-earnings multiple of 18x at the current market capitalization of about $480 million.

Wall Street analysts expect more earnings growth at Winnebago, and its forward-earnings multiple is at 14x estimates for the next fiscal year (ending August 2014). With even longer-term growth expectations in tow, the company's five-year price-to-earnings ratio relative to growth (PEG) -- a measure of how much an investor is paying for growth -- is well below 1.

Still, we would note that Winnebago's stock price is very sensitive to macroeconomic conditions, as shown by its beta of 2.4. In addition, because inventory more than offset earnings, the company showed negative cash flow from operations for the first half -- and this does not seem to be a seasonal effect, as it's a reversal from the prior year. As a result of this, Winnebago's cash balance has declined from $63 million to $26 million.

We can compare Winnebago to Thor (THO), which sells motor homes as well as trailers and small buses. It, too, reported strong results in its last fiscal quarter, with revenue and earnings up 24% and 45%, respectively. Financial markets are less optimistic here than they are with Winnebago, as Thor carries a lower forward P/E of 11x. But its five-year PEG ratio, at 0.9, suggests the sell-side likes Thor in absolute terms, as well. 15% of the float is held short, demonstrating a sizable bearish community, but we think the stock looks as though it has value potential and would be worth investigating.

Winnebago has decent prospects, as well. If the company hits Street targets on a forward basis, we'd need to see very little EPS improvement before the current quote would represent a bargain. The insider purchase seems to suggest some optimism -- though an investor could also take the insider purchase as bullish on the industry in general, and therefore as a signal to look at Thor or other peers. That company, at least after an initial look, seems to have experienced similar growth over the past year -- and it also boasts low-valuation metrics.

For a value investor, either of the two would appear to be a good target for further research.

-- Written by Matt Doiron

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