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Baird: Industry Cautious, Deals With New Normal

Robert W. Baird & Co. issued a client newsletter offering observations gleaned from its “RV field trip” at the 49th Annual National RV Trade Show in Louisville, Ky. The following are highlights from the report.

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 floorplan 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. 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.

Additional Notes:


• Many were concerned about how orders would fare at the Louisville show after open houses in Elkhart, Ind. Manufacturers indicated orders have been solid, and that some dealers who ordered at Elkhart have actually reordered at Louisville.

• Discounting persists, but has not worsened.

• Regions with commodity or agricultural exposure are relatively strong.

Retail Credit Conditions

• Appetite for lending is robust, but demand on the consumer’s part to take on debt is low.

• Possible elimination of second mortgage interest tax deductibility would be a headwind.

• Advances are lower than during peak years (110% of invoice from 140%).

• Average FICO scores remain high (795 from 790).

• Approval rates are high (64%) especially considering more stringent requirements.

• Rates are relatively low (about 4% on average).

Wholesale Credit Conditions

• Wholesale credit is widely available, as lenders look to build their portfolios.

• Curtailments are kicking in earlier than during the boom years (6-12 months versus 18 months).

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 ckennison@rwbaird.com.


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