Baird: Sees Steady Recovery in the RV Market
Editor’s Note: Robert W. Baird & Co. staff attended this week’s National RV Trade Show in Louisville, Ky. Following are excerpts from a client newsletter on their field trip.
We recommend the RV sector and consider Thor a top pick near $30. After meeting with key industry leaders at the RVIA trade show, we anticipate a steady recovery in the RV market. We: 1) like the macro backdrop (wealth effect, tax policy, consumer confidence), 2) expect credit to loosen, and 3) see industry survivors (Thor Industries Inc. and Winnebago Industries Inc.) taking share. Our checks suggest Thor’s discounting is temporary, creating a timely entry point near $30.
Industry survivors are cautiously optimistic. We met with the leading dealers, manufacturers, suppliers and creditors at the 48th annual RVIA trade show in Louisville. Buyer attendance was up 9.7% and the mood was optimistic, but cautious. Survivors are taking share, but planning conservatively, anticipating modest retail growth in 2011.
Wealth, taxes and consumer confidence. Despite stiff economic headwinds, we are reluctantly optimistic. Why? Equity markets are up, congress is likely to extend Bush-era tax cuts and consumer confidence is improving – providing the discretionary resources and consumer mindset to increase spending.
Fresh and lean inventory. Sources confirmed what we’ve been seeing in our dealer surveys – inventory is fresh and lean. Less than 10% of dealer inventory is aged beyond 365 days (down from 45% 12-18 months ago) and inventory is turning 2.2x or better (up from under 1x turn). Several key sources told us creditors report near-peak inventory turns.
Access to credit is the differentiator. The most popular feature today isn’t the slide-out or full-body paint, it’s access to credit. Although we expect credit to flow more easily in 2011, credit has emerged as a durable barrier to entry, benefitting stronger competitors – especially Thor.
Bankers’ new word: “Yes.” We expect credit to flow better in 2011. Bank of America is taking steps to triple its business as Ally Bank reenters the market. At the margin, we expect loan approval rates to improve, amplifying industry growth.
The “discount” discount = opportunity in Thor. Investors “discounted” Thor shares after a disappointing quarter. Unexpected discounts to clear excess finished goods inventory squeezed margin – and frustrated some shareholders. But our conversations suggest the discounts are temporary, creating an opportunity in Thor near $30. While the S&P 500 is within 2% of its 52-week high, Thor trades 24% below its high, Winnebago trades 40%. By comparison, Callaway is 31% shy of its high, Harley is 12% shy and Polaris is within 2%.
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