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These 2 RV Giants Not a "Buy" Just Yet Despite Trading Cheap

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Recreational vehicle (RV) stocks had a strong run on the bourses in 2020 and 2021. Pent-up wanderlust, after being cooped up for months due to COVID-19, had breathed a new life into the RV industry in 2020. Americans experienced the much-needed freedom and fun with RV vacays while traveling responsibly. Despite the widespread vaccination drive in 2021, RV holidays still had their days in the sun in 2021. The demand for RVs held strong as people began enjoying an active outdoor lifestyle along with friends and family. As such, most of the big RV makers including Thor Industries (THO - Free Report) and Winnebago Industries (WGO - Free Report) reported solid results and witnessed share price appreciation last year.  

But these pandemic winners haven’t had a pleasant run on the bourses this year so far. Supply chain disruptions and chip crisis—compounded by the Russia-Ukraine war and lockdown restrictions in China— have been restraining Thor and Winnebago’s operations from reaching full production capacity.  Year to date, shares of THO and WGO have contracted 23.6% and 30.2%, respectively. So, should you take advantage of the price plunge and get your hands on these stocks now at bargain prices? Or is it worth waiting for a better entry point?

Year-To-Date Performance

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Near-Term Macro Concerns Loom Large for Thor & WGO

As we know, the RV market is highly consumer cyclic and dependent on business cycles and economic conditions. Recession fears triggered by sky-high inflation, rising interest rates and aggravated supply chain snarls have started to weigh on RV manufacturers. So, are the good times for RV makers over? Well, the driving trends of the RV industry may not be over but the current economic concerns have definitely put brakes on the momentum. The RV space relies heavily on consumers' affordability. But the emerging macro-economic headwinds are likely to limit the stocks’ growth.

For starters, sky-high inflation (at a 41-year high) is increasing the cost of manufacturing RVs. While THO and WGO are undertaking smart pricing actions to pass the rising costs of raw materials and other components to customers, these efforts might soon not be enough.

A rising interest rate and recessionary fears are likely to act as spoilsports. Amid stubborn inflationary pressure, the Fed was forced to get more aggressive and hiked interest rates by 75 bps this month, the highest increase since 1994. Fed expects less near-term relief from inflation and signaled that it would keep increasing interest rates aggressively in the remaining four FOMC meetings in 2022. 

Higher interest rates translate to increasing cost of financing and the question is whether the customers would be keen on taking a high-interest rate debt to finance their next RV purchase, especially when the economic scenario is so uncertain. Fears of a recession are set to result in a drop in demand and sales volume, thereby hurting the near-term prospects of Thor and Winnebago.  

Owing to macro-economic headwinds, the RV Industry Association has lowered its forecasts for North American wholesale RV shipments between 537,800 and 561,900 units, down from 578,800 and 603,300 units.

But Long-Term Prospects Still Look Promising

Notwithstanding the near-term headwinds, THO and WGO are the most prominent stocks in the RV industry. Both the companies have an economic moat and a proven track record. While the RV industry has taken a beating lately, millennials and zoomers’ zeal for off-the-grid-living bodes well for long-term prospects. Once the economic uncertainty cools off, WGO and THO would again be riding on several tailwinds. Both the companies will benefit from significant economies of scale, strategic acquisitions, strong financials and new product offerings.

Winnebago’s acquisition of Grand Design has expanded its towable RV product offerings. The acquisition of Newmar Corporation has bolstered Winnebago’s Motorhomes segment portfolio. Improvements in its Chris-Craft business and Barletta buyout strengthened its foothold in the Marine segment. As for Thor, the buyout of Germany-based EHG made it the largest RV manufacturer in the world. EHG’s strength in product development, technology and efficiency complements Thor’s North American market standing and has bolstered its foothold in the European market. The acquisition of TiffinHomes further expanded Thor's existing portfolio and is bolstering revenues. The Airxcel acquisition has fortified Thor’s supply chain business in North America and Europe. These buyouts provide Thor and Winnebago with attractive long-term growth opportunities.

Both the companies display strong balance sheets to sail through the economic slowdown. WGO and THO’s long-term debt to capitalization is manageable at 30% and 36%, respectively. WGO and THO’s current ratios of 1.7 and 2, respectively, indicate liquidity strength. The firms also remain committed to maximizing shareholder value. Winnebago’s dividend this year is running at a pace, which is 50% higher than the previous year. It had also authorized an additional $200 million of stock buyback program in October to investors delight. Over the past year, WGO has returned $187 million to investors via buybacks and dividends. Notably, Thor has raised regular dividends for 10 straight years. Just a couple of days back, it boosted its repurchase program up by an additional $250 million.

We also appreciate the firms’ focus on new product developments and expansion into innovative areas that are likely to buoy business opportunities. The rising demand for electric power applications is driving Winnebago and Thor to innovate in the RV space. The companies are poised to gain from their electrified and connected RV products. Early this year, WGO unveiled its futuristic e-RV concepts that promise innovative application offerings to customers.

Final Thoughts

Both Winnebago and Thor appear attractive bets from the long-term perspective at their current price points. THO is currently trading at a trailing 12-month EV/EBITDA of 3.40, comparing favorably with the industry’s 4.78 as well as the firm’s one-year high of 8.02. Winnebago is also trading at a deep discount. Its trailing 12-month EV/EBITDA of 2.84 compares favorably with the industry’s 4.78 as well as the firm’s one-year high of 6.87.

If you have a long-term time horizon, Winnebago and Thor may make up for smart investments. But if you are tempted to buy the stocks at their current bargain prices for short-term gains, you might as well wait for more clarification on fiscal 2023's earnings outlook before diving in.

Thor and Winnebago currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here

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