Baird: Optimism Building Across RV Industry
Editor’s Note: Representatives of Robert W. Baird & Co. met with industry sources at the 50th Annual National RV Trade Show in Louisville, Ky., earlier this week. Following are highlights of their takeaways from that event.
After a steep and prolonged downturn, the mood was decidedly optimistic. Consumer demand is improving and dealers are building confidence – driving robust orders in recent months. Meanwhile, inventory appears balanced if not lean, but the fiscal cliff and tax policy threaten to stall an otherwise upward trend.
Optimism is building. Optimism is building in every corner of the industry, including lenders, suppliers, manufacturers and dealers. After an extended downturn, seasoned veterans see promise in: rising consumer confidence, low interest rates, lean/balanced inventory, and less negative equity. Bullish investors see the industry as a derivative play on a housing recovery as pent-up demand returns and dealers restock.
Uncertainty invites caution. Despite the genuine optimism, our group of industry veterans and investors identified a handful of issues that could derail a recovery, including persistent discounting, the impact of the fiscal cliff on consumer confidence, tax policy on discretionary wealth (including potential end for favorable treatment of interest), and the potential for dealer exuberance to create an inventory bubble. Bearish investors see artificially boosted backlogs driven by an earlier order cycle and aggressive discounting fueling a small inventory bubble ahead of the fiscal cliff.
Inventory balanced, if not lean. After an extended destocking cycle, dealer inventory is fresh and turning well. In anticipation of a better year next year, dealers have begun to build inventory again, transitioning from lean to balanced. We believe the restocking effect could persist for several quarters, but the growing inventory introduces risk to the industry in the event consumer demand fails to materialize. Our dealer checks indicate motorhome inventory is still lean, while towable inventory is balanced.
Other comments follow.
•Preliminary reports indicate that trade show attendance fell 7%, consistent with the sparse feel we observed. Importantly, attendance has been slipping in recent years as more dealers participate in a new show in Elkhart, Ind., which takes place in September. At some point, the two shows may need to merge.
• RVIA raised its shipment forecast during the show. Shipments are expected to increase 10% to 277K units (from prior forecast of +8%, 274K) in 2012 and 4.5% to 290K units (from prior +1%, 275K) in 2013. Many of our contacts considered the forecast conservative.
• Auction values have stabilized, which should help limit negative equity and support trade-in activity.
• Grand Design RV, a startup manufacturer founded by Bill Fenech, Ron Fenech and Don Clark, formally introduced itself to industry partners. The former Thor executives are widely respected across the industry and rightly viewed as a viable long-term threat to entrenched leaders.
• “Go big or get out.” Dealer consolidation has become a more important trend. Multi-site dealers now represent over 15% of all dealerships, two to three times the percentage prior to the recession. The trend provides these dealers with better leverage during negotiations with manufacturers. Soon, some experts believe 80% of industry retail will go through 20% of RV dealers.
• Recent corrections to industry registration data that effectively reduced the measurable level of dealer inventory led Drew to become more optimistic about the industry shipment outlook.After a long destocking period, dealer inventory became excessively lean. Overall inventory levels have rationalized since then, as motorhome inventory remains somewhat lean and towable inventory is more balanced.
• RV ownership is at its highest level ever (8.5% of the U.S. population) due in part to improved marketing and a broad array of product offerings to appeal to a variety of demographics, according to industry participants.
• January retail shows will be the next indicator of consumer demand.
• While the fiscal cliff weighs on the minds of investors, manufacturers and dealers, many noted that the issue is not top-of-mind with RV consumers.
• While there is little doubt that Obamacare will have an impact, industry participants indicated there is still a great deal of uncertainty surrounding the regulations and their implications, including the timing of the impact. In many parts of Indiana, employees do not participate in company-sponsored healthcare plans based on religious traditions.
• There is some concern that the Consumer Financial Protection Bureau may regulate dealer-arranged financing – a move that would be detrimental for the industry.
• The possible elimination of the second mortgage interest deduction weighed on the minds of investors and was acknowledged as a potential headwind.
• Discounting has persisted due to competitive pressures as OEMs look in the fall to secure shelf space for the Spring season.
• Floorplan financing is more than affordable for well-qualified dealers (near 4%).The consumer loan portfolio remains healthy overall, with post-2009 originations in “pristine condition – better than ever” according to industry lenders.
• Loan-to-value averages near 90% (based on wholesale) – high quality borrowers may hit up to 120%.Kentucky Exposition Center.
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