Editor’s Note: The investment firm of Robert W. Baird & Co. distributed an analysis of the leisure market to investors. Highlights of that note follow.
We hold an optimistic consumer discretionary outlook as demand improves in the context of lean channel inventory. We believe improving values in big ticket items (RVs, boats,motorcycles, houses) may re-inflate a wealth effect for more consumers. Meanwhile, dealer inventory appears lean-to-balanced, supporting a modest re-stocking effect before a bubble builds. Longer-term, we are concerned that deficit spending and tax policy will lead to recession – but a wealth effect and restocking-effect suggest trends will get better before they get worse.
• Tectonic pressure on the economic fault line. Massive pressure is building on both sides of the economic fault line. On the bullish side, a housing recovery, low interest rates, and open-ended quantitative easing are re-inflating a wealth effect that should drive new spending. On the bearish side, the fiscal cliff, deficit spending, and tax policy on discretionary wealth are fueling a growth/debt crisis that eventually will lead to a recession, in our view. Although we see risk building, we believe that consumer footing is firming – supporting our optimistic outlook for 2013. We stress that channel inventory is lean-to-balanced, alleviating the risk of a demand shock. At the margin, we favor ideas with a compelling product cycle (PII) or turnaround agenda (HOG, BC) to purely cyclical ideas.
We emphasize three cycles to assess consumer discretionary fundamentals: spending, inventory, and product.
• Spending cycle. We see a better housing market as the mother of all catalysts, washing away the prime source of negative equity on most consumer balance sheets. Fed policy specifically targets the housing market, and it may not quit until it succeeds (damn the consequences). Meanwhile, we monitor pockets of equity accumulating in product categories, from boats to motorcycles, and believe the tide rising in some markets.
• Inventory cycle. Our checks indicate dealer inventory remains lean-to-balanced. After an extended destocking period, dealer inventory is fresh and turning quickly. As confidence builds, dealers have an appetite for more inventory. Before inventory becomes bloated, we expect a restocking effect to play out, in which more is shipped into the channel than is sold. It can take years to build an inventory bubble, but 2013 may be the year it starts to inflate.
• Product cycle. Economic cycles matter less for innovative companies that create their own product cycles.
Bottom-up Approach. Our coverage process emphasizes bottom-up research and proprietary channel checks. We capture insight from industry sources and local dealers to monitor retail trends, inventory levels, order plans, credit availability, and business sentiment. Recently, these our checks indicate better retail, lean inventory, and improving dealer sentiment – supporting our broadly optimistic outlook.
RV Dealer Survey. We contact over 100 RV dealers every quarter and host an annual field trip to meet with industry contacts. The end-of-quarter survey, our longest-running dealer survey, gives us an excellent read on traffic, retail, inventory, credit, and sentiment. Today, dealers are gaining confidence as retail improves, stimulating orders to build inventory after a long de-stocking period.