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Baird Issues Downgrade on Three RV Builders

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September 29, 2008 by   Leave a Comment

Robert W. Baird & Co. downgraded three recreational vehicle makers, including Coburg, Ore.-based Monaco Coach Corp., saying falling oil prices and early investment in cyclicals has boosted valuations, but fundamentals remain “dreadful.”
Reuters reported that the brokerage cut Monaco to “neutral” from “outperform,” while Thor Industries Inc. and Winnebago Industries Inc. were downgraded to “underperform” from “neutral.”
A rash of problems, including soaring fuel prices, a housing market slump and a weakening economy have ravaged motorhome makers over the past year as buyers keep away from showrooms.
“Disappointing retail trends can cause dealer inventory to rise and dealer orders to fall, adversely impacting stock prices,” analyst Craig Kennison said in a note to clients.
He expects more dealers and manufacturers to exit the market during the off-season.
Kennison, whose outlook for Monaco hinges on its ability to secure credit soon, said the company’s solvency would be severely hurt if it failed to borrow $30-$40 million, which is needed to further secure $100 million in credit.
The company had received a waiver in July for non-compliance with certain debt covenants and it had committed to a $100 million senior credit facility, replacing a prior facility, with an existing bank syndicate member.
Kennison, however, said Thor and Winnebago are positioned to survive and will take share as competitors exit.
“With available cash and operating cash flow, we believe Thor is capable of supporting acquisitions, internal growth initiatives, share buybacks, and higher dividends,” he said.
Thor, which is the dominant market leader in towables with about 30% share, is likely to sharpen its focus on the diesel market as an ongoing initiative, said Kennison, who has a price target of $20 on the stock.
Monaco, with 26% of the Class A diesel market, is the leader in the luxury segment of the RV industry. The company operates at significantly lower operating margin than its leading competitors, the analyst wrote.
“We believe lower interest rates could lead a recovery in the Class A market, potentially driving significant upside to Monaco’s earnings,” Kennison, who has a price target of $5 on the stock, said.
In August, Class A shipments fell 69%.
Kennison said though he expects competition to intensify at the low end of the diesel market, he sees Winnebago gaining share as it pursues the lower price points more aggressively.
“We believe that investors seeking a pure way to invest in the strong demographic trends in the RV market should consider Winnebago,” he added.
Kennison has a price target of $12 on Winnebago, which leads the motorhome market.

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