Winnebago Industries, Inc. (NYSE:WGO) manufactures and sells recreation vehicles and marine products primarily for use in leisure travel and outdoor recreation activities. Year-to-date, the firm’s financial performance and stock price have been experiencing significant weakness. WGO has lost more than one quarter of its market cap since the start of the year, substantially underperforming the broader market. The firm’s revenues and earnings have also fallen substantially compared to the prior year.
The aim of our writing today is to take a look at the firm’s latest quarterly results, which have been published on the 20th of June 2024. We will examine the company’s financial performance and compare the metrics to last year’s figures.
To conclude our article, we will assess the firm’s valuation based on a set of traditional price multiples and discuss whether the current stock price could be attractive for investors.
Quarterly results
Winnebago has missed analyst estimates, both top- and bottomline. Revenues came in $11.6 million below initial estimates, while EPS were $0.18 lower than expected. The firm’s profitability has also substantially deteriorated compared to the prior year.
Let us now take a deeper look at the financial statements to understand why the financial performance of the company has deteriorated so much.
Revenues
On a consolidated basis, WGO’s fiscal Q3 revenues have declined by as much as 13% year-over-year. The primary drivers of the decline have been the product mix – customers opting for cheaper alternatives – and the lower volume of units sold, partially offset by selective price increases.
If we break down the results into three segments, namely towable RV, motorhome RV and marine, we can see that the marine segment has had the worst performance compared to the prior year. While revenues in the towable RV segment have remained relatively flat, revenues in the motorhome RV segment have declined by 20%, while in the marine segment by 32%.
Considering the current macroeconomic environment and the volatile consumer sentiment, these results are not surprising.
Also important to point out that since 2022, WGO has been losing market share in the North American RV market, both in the motorhome RV and the towable RV segment.
The marine segment looks slightly better in terms of market share gain, as the firm has managed to expand in that space.
Looking forward, however, we remain pessimistic. We do not believe that there is a catalyst in the near term, which could fuel the demand for RVs and lead to a significant uptick in the number of units sold. We believe that the growth potential of WGO (and also of other firms in the space) is limited in the coming quarters. Looking at the backlog of each segment also raises concerns. In the motorhome RV and marine segments, the backlog has shrunk by more than 50%, while in the towable RV segment it has went down by 35%. These numbers are significant. And they indirectly indicate how the demand may develop in the coming quarters. Unfortunately, what they are showing is not too bright for WGO.
Profitability
Not only revenues have suffered, but profitability has also deteriorated. The gross margin of the firm has shrunk by 180 bps, due to higher warranty expenses, the deleveraging effect of slowing sales and operational efficiency challenges. As a result, adjusted EBITDA has fallen to $58 million and the operating margin has contracted by 330 bps YoY, falling to 7.4%. These negative impacts have cascaded all the way to the bottomline of the balance sheet. Adjusted EPS came in at $1.13, roughly 47% lower than in the prior year.
Based on the revenue and profitability trends, we believe that there is not much that could justify a bullish view on WGO’s business from a fundamental perspective. We would like to see consumer sentiment improving, demand rising, and profitability growing, before we could consider an investment in Winnebago.
Return to shareholders
Despite the weak financial performance, WGO has remained committed to returning value to its shareholders through quarterly dividends and share buybacks. These payments and buybacks appear to be safe and sustainable, as the firm’s free cash flow more than covers the expenses. We have to, however, always ask ourselves the question, is it the best way of using cash right now? When the firm is going through financial difficulties, maybe there could be better use of this money to help fuel future growth.
On the other hand, we also have to mention that the firm has a strong balance sheet and strong liquidity with both the current- and quick ratio well above one, meaning that the firm has current assets on hand to cover its current liabilities, which is key during turbulent times.
Valuation
To assess the valuation of the firm, we will be using a set of traditional price multiples. The following table compares WGO’s actual metrics with those of the consumer discretionary sector median, as well as with its own historic ones.
We can see that WGO is selling at a discount compared to the sector median, but also at a significant premium compared to its own historic valuation. We believe that such a premium is not justified. Declining revenues, declining backlog, declining profit, shrinking market share and contracting margins are all indicating that we should not be paying a premium compared to the historic valuation when the firm has been actually growing.
Conclusion
WGO has reported disappointing results in the previous quarter, missing analyst estimates both top- and bottomline.
Margins have also contracted, and the firm has kept losing market share in its most important segments, the towable RV and motorhome RV.
The company has remained committed to returning value to its shareholders through quarterly dividend payments, however, we have to ask ourselves whether it is the right decision in the current, challenging macroeconomic environment.
We believe that the firm's valuation is not justified based on the fundamentals and financial performance.
For these reasons, we rate WGO as "sell".
Bela Lakos
Petroleum engineer with an enthusiasm for investing, accounting and personal finances.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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