Baird's RV Industry Analysts Discuss the 'New Normal'
Editor's Note: The following notes come from Robert W. Baird & Co. following analysts' field trip this week to the 49th Annual National RV Trade Show in Louisville, Ky.
Notes from RV field trip. We met with key dealers, lenders, suppliers and manufacturers at the RVIA trade show in Louisville. The mood was more cautious than last year, with many veterans accepting a "new normal" awaiting a better economy. Our models are consistent with this outlook, yet investor sentiment has soured. We acknowledge the lack of catalysts, but valuation doesn't make sense to us, creating an opportunity for patient investors.
Industry insiders expect flat retail. Industry veterans, including bankers, dealers, suppliers, and manufacturers expect flat retail in 2012 – largely consistent with the expectations embedded in our Thor and Winnebago models. The RVIA industry shipment forecast for 2012 calls for wholesale down 2.6% – roughly consistent with this outlook. After a weaker end to 2011 following more optimistic expectations a year ago, industry players are being more conservative looking ahead.
Dealer inventory is fresh and balanced. Key floorplan lenders, including GE Capital and Bank of America, report that dealer inventory is fresh and balanced. Aged inventory (over 365 days old) is under 10% and dealers are turning inventory 2.25x-2.50x, a stronger pace than is typical. Investors are concerned that a promotional deal to subsidize wholesale finance costs during the winter may backfire, but lenders we met with were very comfortable with inventory levels.
Credit trends are unchanged. Credit trends eased last year, stimulating early 2011 sales before the recovery soured. Based on our conversations, access to both wholesale and retail credit remains healthy, but largely the same. Dealers are utilizing 64% of available floor plan capacity, down from 67% last year – and FICO credit scores remain very high (795 vs. 790).
Outlook. Without a macro catalyst, investor sentiment may struggle to recover – but sector valuations already discount a no-recovery scenario. Thor, which has $3.77/share in cash and no debt, is poised to earn over $2/share this year, with a chance to earn over $3 in a recovery scenario. Winnebago, which has $2.37/share in cash and no debt, has the potential to earn over $1/share in a recovery scenario, and appears more open to return excess cash to shareholders (although small non-RV acquisitions remain a likely use of cash as well). Net, we see value for patient investors, but acknowledge the need for a much better macro outlook to drive shares higher. A stronger consumer confidence report is a good start.
Note: This summary of a Baird research report is not intended as investment advice. To participate in Baird surveys and receive research reports, contact Craig R. Kennison, CFA, at email@example.com.