Kathryn Thompson, a prominent analyst of the RV industry who was frequently quoted by RVBUSINESS.com when she was affiliated with Avondale Partners, has now formed her own firm, Thompson Research Group.
The equity research firm will continue to do much of the same type of research she performed at Avondale Partners, “perhaps with a greater emphasis on industry work,” she stated.
“We should be gearing up our RV dealer survey over the next two weeks,” she said.
Meanwhile, in her new capacity, Thompson issued a “hold” recommendation for shareholders of Drew following the recent release of Drew’s first-quarter results.
“Management seemed relatively upbeat on the quarter end conference call about the recent improvement in business relative to Q1’09,” she stated. “We would point out that after passing through the desert of Q1, any improvement will be meaningful. Management indicated that several customers have backlogs filled through the annual summer RV industry shutdown in July. April 2009 sales improved 19% vs. March 2009, a higher than typical seasonal increase.”
She conclued, “With shares of DW having run 161.3% since early March vs. an S&P 500 increase of 28.8% over the same time period, we think that valuation has gotten ahead of itself at this time. While we are encouraged to see some signs of a seasonal uplift in the business, we are by no means out of the woods yet. Financing remains tight at the wholesale level which is limiting dealer inventory replenishment. Until there is a meaningful return in consumer confidence (thereby improving retail inventory turns), we believe financial providers to the industry will limit providing additional flooring dollars to dealers. Additionally, if the consumer continues to remain tight, we anticipate dealers will continue to lower inventories heading into the fall, and will be unlikely to ramp up meaningfully orders of new product (i.e. we could see sequential decreases in orders). At this time, we are hard pressed to see additional upside in shares at this time.”
As the recession nears a bottom, many believe RVs may be ready to turn the corner.
“The RV industry serves as a bit of a microcosm of the housing market,” says Craig Kennison, an analyst at Robert W. Baird. “The recession affected the RV industry first, so we’d like to believe that we’ll see it turn before the rest of the economy.”
The $37 billion industry took off in the 1960s, as millions of Americans purchased RVs to realize their American Dream and travel around the nation. The fascination stuck, growing with each passing decade, according to CNBC.
There are now about 8.2 million RV owners across the nation, according to the Recreation Vehicle Industry Association (RVIA). Unlike the stereotype of older couples hitting the road after retirement, the average RV owner is middle-aged and married, traveling a total of 4,500 miles and 26 days annually.
Right now, the biggest roadblock to a recovery has been consumers’ inability to secure credit to buy an RV.
“The single biggest issue for the industry is financing,” said Winnebago Industries Inc. CEO Bob Olson. “People just can’t get financing from major lending institutions. This is affecting retail and wholesale customers.”
With credit tight, there has been less need for inventory at RV dealerships. At the end of last year, wholesale shipments had fallen by 75%, according to a research note from Baird.
Such drastic cuts have severely impacted many manufacturers. RV makers Fleetwood Enterprises Inc., Country Coach and Monaco Coach Corp. recently sought Chapter 11 bankruptcy protection.
As companies go under, they leave room for larger, more stable companies to take over the industry.
Thor Industries Inc. and Winnebago will be among the survivors. It’s a matter of having a sound balance sheet,” Kennison said. “They will gain a significant amount of market share as other companies exit the market. At the end of this, there will be a considerably significant advantage for Winnebago and Thor.”
This potential is not lost on the RV companies.
“We have a good foundation to weather this storm,” Olson said. “We have no debt and an excellent management team. The economy will turn and we are well poised to take advantage of it.”
Thor did not return phone calls seeking comment.
Investors have taken notice as well, believing that the crunch in the industry will benefit larger companies. They are taking interest in the likely survivors, said Kennison.
However, valuation of the stocks is difficult to discern, since RV companies aren’t making money in the current economic environment. Kennison’s firm has come to terms with this issue by estimating free cash flow for future years and discounting it by the cost of capital. He currently rates both Winnebago and Thor stocks as neutral.
Despite the difficulties facing the industry, things might soon be looking up as a bottom may be forming.
“Sure, sales are down, but we don’t look at it negatively,” said Dena Hurley, president of Crossroads Trailer in Newfield, N.J. “It’s down a little, but not much, people are still buying RVs.” There has been an increase in customers in the last few months, Hurley said, a trend which has been seen nationwide.
In addition, retailers have indicated their intentions to stop decreasing inventories, said Kathryn Thompson, an analyst at Avondale Partners, in a research note.
If the RV industry is bottoming, it may be indicative of the beginning of a new trade cycle. Motorhome sales follow an average four- to six-year trade cycle, with the last one peaking in 2004. After five years, industry watchers are expecting an upswing within the next two years.
Many also believe there to be pent up demand in the public, signaling an increase in sales as the market begins to prosper and consumer confidence returns. The numbers from the Florida RV Super Show in Tampa in January reveal an interest in the purchase of RVs within the general public. The show drew record numbers, with over 10,000 guests during the exhibit’s first two days.