Description

Intro:

I believe WGO is a highly attractive and contrarian risk/reward long idea.  It was recently written up as a short by magundun on July 26th, 2022.  I recommend that you read the write-up as it represents the classic consensus dilettante view of WGO.  I believe a more thorough review of the business and financials yields a much different conclusion.  I also encourage you to read the company's most recent investor presentation as it provides an excellent overview of the business: https://winnebago.gcs-web.com/presentations

In my base case, I believe there is 118% upside to the share price over the next year.  In my upside case, I believe there is 265% upside.  At the same time, I see very limited fundamental downside in the share price over the next year.    

Business Overview:

Winnebago Industries (WGO) is a leading North American manufacturer of towable RVs, motorhomes and boats.  It produces its motorhomes in Iowa and Indiana, its towable units in Indiana, and its boats in Florida.  It distributes its products throughout North America through independent dealers.  Its sales and EBIT are split roughly 35% motorhome, 55% towable RV units and 10% boats.   

The Towables segment (55%) manufactures and sells travel trailers and fifth wheels under the Winnebago and Grand Design brands.  Retail prices are in the range of $25k to $150k depending on the size and model.

The Motorhome segment (35%) manufactures and sells motorhomes under the Winnebago and Newmar brand names.  Retail prices are in the range of $100k to $1.5M in this segment.  The company also generates revenue through motorhome parts and service, and from the sale of replacement parts.  

The Marine segment (10%) manufactures and sells boats under its Chris-Craft and Barleta brands through a network of independent dealers.  

The company has been expanding its business through a series of highly successful acquisitions.  In 2016, the company acquired the towable brand Grand Design for $500M.  In 2018, WGO acquired Chris-Craft which entered it into the ultra-high end boat segment.  In 2020, it acquired Newmar for $357M (sales of $390M / EBITDA of ~$55M at time of acquisition), which increased its position in the high end motorhome segment.  It acquired Barletta for $255M in 2021 which got it into the fast-growing premium pontoon-boat segment (EBITDA ~$50M at time of acquisition).  

The stock currently has a ~$2B market cap, ~$350M of net debt and trades $45M per day.  The company is expected to generate roughly $630M of EBITDA and $450M of free cash flow this calendar year.  The stock has a dividend yield of 1.7% and short interest equal to $350M / 18% of the float or 9 days of ADV.   

Thesis Overview:

I believe that most investors are materially misunderstanding the industry as well as the significant transformation that WGO has undergone over the last 5 years.  As a result the casual observer believes that the significant revenue and earnings growth is almost entirely due to it being a "COVID winner."  In fact, most of the growth is due to 1) strong secular growth in the RV industry 2) significant market share gains at WGO 3) smart acquisitions that have materially grown WGO's business and market share 4) structural improvements to margins through cost cutting initiatives and efficiency gains and 5) revenue and earnings growth through inflation passthrough and capture.

The RV industry has strong secular growth trends:

Since 2009, the RV industry has consistently demonstrated solid secular growth trends, as units shipped have growth at a ~7% CAGR, going from low ~200k in 2009 to ~550k in 2021.  This secular trend is being driven across all demographics and driven by trends towards the outdoor lifestyle.  Consensus mistakenly believes that there was a huge RV bubble driven by the Covid pandemic.   While shipments increased significantly more than that in 2021 and 1H 22, as the industry needed to catch-up after a huge drop-off from the pandemic-driven production shutdowns, the actual retail unit sales did not grow significantly more than the long-term trend.  The data indicates that retail sales only trended 5% to 10% ahead of the long term trend during the pandemic period. I believe that these secular trends are still intact, or may actually be accelerating as a result of the pandemic-driven lifestyle changes and increasing number of retirees.  I believe that retail unit sales will continue to CAGR in the 5 to 10% range for many years to come.

The RV industry has a highly consolidated market structure:  The North American RV industry is highly consolidated with the top 3 players controlling roughly 90% of the market.  Specifically in Towables publicly traded Thor Industries (THO) has 41% market share, Berkshire-owned Forest River has 38% market share and WGO has 10% market share.  No one else has more than 1.5% market share.  Within motorized, Thor has 48% market share, WGO has 20% market share and Forest River has 18% market share.  As a result of this oligopolistic industry structure, the industry has been very successful at passing through labor, parts and raw material costs during this period of inflation.  As the manufacturers has finally caught up after being underinventoried, the industry has shown strong discipline over the last few months in cutting production to match production / inventory to demand levels.  In fact the RV shipment data reported this morning shows a ~33% reduction in RV shipments on a yoy basis, which is well below current retail trends.  This demonstrates strong discipline from industry players and highlights the benefits of this favorable market structure.

WGO has consistently gained significant market share for the last 6 years:

In 2016, WGO had $1B sales, $71M of EBTIDA, 3.3% RV market share, and a market cap of $700M.  This compares to TTM sales of $4.3B, TTM EBITDA of $630M, RV market share of 12.7% and a market cap of $2B.  Specifically, its towables market share has more than doubled from 2017 to 2022 on an organic basis, going from 6% to 13%.  The market share gains have been consistently 1.5% to 2% per year.  This has driven them to consistently grow retail sales at 15% to 25% higher rate than the industry.  Much of this market share gain has been driven by its extremely successful acquisition of the towable brand Grand Design for $500M in 2016.  Incidentally, I believe that Grand Design alone is currently worth as much or more than the entire $2B market cap of WGO.  

WGO has stable and structurally improving margins 

Prior to Mike Happe taking over as CEO towards the end of 2016, WGO was very poorly managed.  Over the last 6 years the company has embarked on a significant efficiency improvement program which has professionalized the manufacturing and sales operation.  As a result, WGO EBITDA margins have been steadily improving over the last 6 years, with a low of 7% during 2020 and a high of 12% in 2021.  They equaled 9% from 2017 to 2019, a period during which they had much lower market share than they do now, and also did not have the higher margin Newmar and Barletta acquisitions.  While it is difficult to give precise numbers around the impact of these initiatives, the company believes that they can maintain a double-digit EBITDA margin even in a tougher economic backdrop.  I estimate that that EBITDA margins have structurally improved by 250bps since the pre-pandemic period.

WGO has a strong balance sheet and excellent capital allocation track record:  WGO under its most recent CEO Mike Happe has completed 4 acquisitions.  Its largest acquisition, Grand Design, as referenced above was an undeniable home-run success.  While its acquisitions of Newmar and Barletta are more recent, they have also clearly been successful and created meaningful shareholder value.  Barletta specifically has accelerated its market share gains in the pontoon segment under WGO stewardship, and checks indicate that retail sales growth in the 30%+ range continues to outpace their ability to produce boats.  As a result they are currently adding additional capacity at Barletta to keep up with demand.  

Furthermore, the company initiated a $200M share repurchase at the end of 2021 to take advantage of its discounted share price and unlevered balance sheet.  Last week it announced that it had completed this share repurchase (roughly 12% of the float) and initiated a new $350M share repurchase (roughly 20% of the remaining float).  It also announced a 50% dividend increase in conjunction with this announcement.  Given the company's low cost of financing these repurchases are extremely accretive to EPS and not currently embedded in consensus estimates.  I estimate that the most recent repurchase authorization if executed adds 15% to EPS and FCF / share.   

The company has completed all of these acquisitions, as well as share repurchases, and currently has only $300M of net debt, or only ~0.5x of TTM EBITDA.  The company should generate about $480M of free cash flow this year alone.  The company is comfortable with a leverage level of 0.9x to 1.5x which gives ample room to repurchase shares or do additional accretive acquisitions.   

WGO has significant future potential as a leader "E-RVs":  WGO is continually focused on innovating for the future.  While E-motorhomes still likely have several years before they contribute materially to financial results, WGO is positioning itself to be a leader in this area through its E-RV concept vehicle: https://www.winnebagoind.com/electric.  I believe that this has the potential to expand the market for motorhomes and provide a new growth avenue for the business. https://www.caranddriver.com/news/a40302213/winnebago-e-rv-first-look/ 

WGO stock has very low sentiment:  WGO stock currently has relatively low active institutional or hedge fund ownership.  Short interest is currently 18% and itis 9 days to cover.  This short interest is roughly double its long-term averages.  It is worth noting that famed value-investor Norbert Lou (Punch Card Management) currently owns 3.7% of WGO shares, and has it as his 3rd largest holding after Berkshire Hathaway and Ally Financial.    

 Valuation:

I primarily value WGO on a normalized EBITDA / earnings basis.  To estimate normalized earnings power, I use their reported 2019 EBITDA results as a baseline, and add the EBITDA acquired in the Newmar and Barletta acquisitions in 2020 and 2021.  I then adjust the numbers higher for the growth of the RV market, WGO’s market share gains, WGO’s margin improvement and WGO’s benefit from inflation / pricing passthroughs.  With this analysis, I get a range of normalized EBITDA from $360M to $600M, with my base case at $490M.  This compares to $630M of consensus EBITDA for 2022.  

Putting it all together, in my base case, the company is worth $137 per share or 118% more than the current share price.  In my upside case the stock is worth $230 or 265% more than the current share price.  I see fairly limited fundamental downside even using stressed downside assumptions and stressed multiple (6x normalized EV / EBITDA).  I’ve pasted the table below summarizing the results of this analysis in the downside, base and upside cases:

Note that magundun’s July 26th WGO short writeup estimated $190M of EBITDA in normalized scenario, which is obviously incorrect and materially too low given that this is what they were able to achieve in 2019, before acquiring Barletta or Newmar, and before accounting for the industry growth, market share gains, margin improvement and pricing power.  That said, I think this sort of backward looking analysis is fairly typical of the work being done by analysts on WGO and is what creates the tremendous opportunity to acquire the shares at this deeply discounted level.  

Risks:     

A significant consumer downturn is clearly the main risk.  However, I believe WGO will fair well in this scenario vs peers given its strong balance sheet and business and highly disciplined oligopoly industry structure.  If one wants to reduce volatility to these risks they can be hedged through other RV, powersport, or consumer peers.

Catalyst

The stock re-rates as the market recognizes the materially higher normalized earnings power

Continued aggressive share repurchases

Possible strategic or private equity acquisition if the stock remains at these depressed levels