Editor’s Note: The following analysis comes from David Ristau, contributor to The Oxen Group’s Instablog. Ristau is an avid, experienced fundamental and technical day trader, specializing in intraday trades that are based on value and fundamental indicators along with technical and entry/exit analysis, according to the website. He is a financial writer for Phil’s Stock World (Phil Davis) under the name of The Oxen Group. He writes about his Play of the Week: Winnebago Industries Inc.
Play of the Week: Winnebago Industries Inc. (WGO)
Analysis: One of the industries most hurt by the recession was recreational vehicles and large motorized vehicles, in general. Most consumers have throughout the recession tried to avoid a large amount of big-ticket purchases due to the uncertainty in the economy and job market. One of the industry’s leaders, Winnebago Industries Inc. (WGO), lost nearly half of its market value since the beginning of 2007. The company, from the end of fiscal year 2007 to 2009, lost nearly 75% of its revenue, moving from just over $800 million to just over $200 million. The company had profits of just over $40 million in 2007. While in 2009, the company settled for a loss of $78 million. The last few years have been rough on the industry certainly, but it may be time for the RV industry to start making money again.
In Q2 of 2010, the company reported its first profit since 2008. The company just got by with a $760,000 profit, but it was definitely a great sign for the company that recovery is on the way. The company is projected for this quarter to hit a profit per share of 0.04. Over the past two quarters, however, the company has produced surprise earnings, and a third one could be on its way for a number of reasons. Last quarter’s turn to profit and 120%-plus surprise profits is definitely going to give this company some buzz over the coming week, and I expect it will grab some buyers that will help move this into our weekly 4%-6% gain range.
WGO, for this year, has revenue estimates over $400 million, nearly doubling their revenue from one year ago. The increase in consumer spending and slow recovery is being seen most directly in a company like WGO. Some of the numbers from Q2’s report are outstanding. The company made a 247% increase on revenue from Q2 2009 to 2010. The drive in this increase was from motorhome unit deliveries. The company, additionally, is selling most of their motorhomes in the Class A category, which are the smaller motorhomes that allow the company to have large production and efficiency. Operating income was still at a loss, but it improved $18 million from one year ago. The company increased its revenues through the first six months of fiscal 2010 year 89%.
The following comment from the Chairman and CEO Bob Olson gives a nice overview of how things are going:
“We are pleased to see a continued trend of sequential growth in revenues and gross profit. After hitting our lowest shipment levels in decades during the second quarter last year, we have seen improvement in revenues and gross profit each quarter since that time. We also saw a sequential increase in dealer inventory this past quarter for the first time in two years as we increased our production levels to satisfy our sales order backlog. While we are encouraged with these improvements, the economic outlook remains uncertain and we believe retail sales will be the key driver to sustain our recovery and for continued growth going forward.”
Olson mentions the backlog, which is extremely important to any company that takes orders before production or has orders that are being filled. The backlog is a great measure of future success for construction companies, large motorized vehicle makers and cargo companies. WGO’s backlog at the end of Q2 2010 was 1,159 motorhomes, which is an increase of 246% at the same time in 2009. That backlog means that orders are coming in at very strong rates, and it will help the company to produce more and more revenue moving forward. As a whole, companies have all been seeing rising revenue rates, and it is no different in the RV industry. The difference is that this industry has so much to recover.
The industry, as a whole, has been doing very well. Coachmen, the bankrupt company, saw a 90% increase in their quarter-over-quarter net sales despite being bankrupt. Thor Industries Inc., while having some accounting problems on previous reports, had an surprise EPS increase of 10%. The recreation companies, as a whole, are starting to see a nice pickup throughout the sector, and that should play into WGO throughout the week.
When we do a weekly play, we want a company that can have reasons for expectations moving into the earnings rather than not having much expectations before earnings and then moving into earnings date we can buy right before and make large gains. The technicals are superb for this. WGO is well below the mid-50-point on RSI. It is oversold on slow stochastics, and it is riding its lower band. On fast stochastics, the stock is starting to see a lift off its oversold floor, which points to a short-term buyer interest starting to prop up.
The market looks very healthy right now, and it is all pointing in the right direction towards a great week for Winnebago.
My final comment is that if you do not believe me … here is Robert W. Baird’s take:
“Winnebago reported a smaller operating loss – suggesting lower breakeven levels than previously thought – a good sign. The backlog is robust (+246%), but better shipments reflect strong orders and inventory replenishment – not a recovery in retail (-2%). We raised our estimates to reflect lower breakeven levels and a good mix of diesel units, driving our price target to $15.”
Entry: We are looking to get involved at $11.20 – $11.30
Exit: We are looking to gain 4-6%.