Recreational vehicle manufacturer Winnebago (WGO) is setting up as a potentially interesting situation. In fact, it is a value-investors dilemma. On paper, if you just look at the fundamentals, it appears to be a screaming buy. However, there is more to this story that needs to be considered before deploying capital.
WGO certainly caught my attention recently. Shares are down 26% year-to-date, and it trades at just 4.5x this year's consensus estimates (FY ends in August), and it garners fairly wide coverage by 10 analysts for a company of its size. The company has been in the black for the past seven consecutive quarters, and boasts an 8% net profit margin for the trailing 12 months. The balance sheet is not bad either. The company ended its most recent quarter with $135 million in cash and $537 million in debt, for net debt of $402 million, less than you might think for a manufacturer.
Demand has been very strong for RVs throughout the pandemic. Last week, WGO reported better than expected second quarter results with revenue of $1.16 billion beating the consensus by $60 million, and earnings of $3.14 better by 23 cents. The backlog for towable products rose 55% to $1.9 billion, while the motorhome backlog rose 22% to $2.2 billion. The market rewarded WGO shares with a post earnings release 12% drubbing last Wednesday.
The earnings picture for 2023 is not quite as bright as it is this year, although the stock is trading at just 5.5x forward earnings. That's still ridiculously cheap, assuming the company can meet those expectations. However, that valuation demonstrates a level of doubt by the market, which is pricing in uncertainty on several fronts.
First off, gas prices are a weight at this point, and the extent to which prices remain at current levels or climb further could impact revenue. While the company does manufacture vehicles that get 20 mpg, a prolonged bout of higher energy prices would likely render consumers less likely to buy an RV.
In addition, a protracted bought of inflation could drive RV prices higher. WGO raised prices 7% on 2022 models. Finally, prospects of a recession, which would likely curtail demand, may also be a weight.
WGO is a great example of "cheap on paper", but perhaps not so much in this ever-changing economic environment. At least, the level of uncertainty needs to be recognized and considered. Current short interest stands at just under 14%, so that's a number I will be keeping an eye on.
WGO was been on fire throughout much of the pandemic, with growing demand, and solid earnings but the current environment might be a gamechanger, at least for now. That's what the market is telling us. As a bit of a contrarian, I don't always listen to what the market is presuming or saying, but in this case, it gives me pause.