The Skeptical Long-Term Case for Winnebago Industries

The coronavirus has had its winners and losers, and RV manufacturer Winnebago Industries (NYSE:WGO) has been among the top winners so far. Winnebago’s share price has risen by 72% compared to one year ago, and by nearly 350% compared to its March lows due to the coronavirus. By comparison, even Amazon (NASDAQ:AMZN) has only risen about 60% since mid-March, and other tech giant winners report similar results.

Winnebago’s shares could surge even higher as next week it plans to release its quarterly results ending in May. It should be noted that despite its recent stock price surge, Zacks Equity still expects a year-over-year decline in earnings on lower revenues, with revenue falling by 34% compared to a year ago.

Winnebago is not a company which was frequently discussed before the coronavirus, and any investor who correctly predicted that its share price would surge should be proud of themselves. But over the long term and as we eventually recover from the coronavirus, investors should ask whether Winnebago will have the staying power to benefit. There are reasons to not jump into this suddenly rising stock right now.

The Return of the RV

The case for Winnebago and the reason why its stock has been successful since collapsing in mid-March is simple. Customers who never before would have considered a RV are now buying them due to a multitude reasons. The Wall Street Journal reported that Winnebago’s larger competitor Thor Industries (NYSE:THO) is seeing a surge in first-time buyers who are looking to use RVs as mobile offices and a way to go on vacation.

With airports and trains being far less comfortable and more dangerous thanks to the coronavirus, potential vacationers are turning towards RVs and camping as an alternative to vacationing. RV owners can better ensure their vehicular interior is safer compared to an airplane cabin, and restrictions on camping are often less onerous compared to other tourist destinations which are often outright closed. Furthermore, low gasoline prices created in part to the coronavirus make RVs a better deal.

All of this makes sense. But RV salesmen talking about new buyers coming into their lots remains anecdotal data. And while we do not yet have Winnebago’s financial report concerning the 2020 2Q, we do have Thor’s which released its report earlier in the month. While the two companies are certainly different, looking at Thor is an indicator for how well the RV industry as a whole has handled the coronavirus.

What Thor shows is that for the three months ending April 30, 2019, its sales decreased by 33% compared to the same time period in 2019. That percentage is comparable to the revenue decline which is expected for Thor as it reports its results from March to May.

Given the current economic mess, a 33% decline is not a bad result. And there are reasons, such as the ones listed above, to think that RV sales will continue to rise over the next few months. But that expectations are largely already priced into Winnebago’s rise, as the company is trading at its highest P/E ratio since 2013.

The Long-Term

I do suspect that Winnebago will surpass its current expected short-term results, which will naturally result in its stock rising, even if it is beset by lawsuits from 18 wheeler wreck lawyers. There is evidence, though anecdotal, of a rising interest in RVs. And despite the revenue decline, this is hardly a company fearing bankruptcy or even serious financial trouble.

In its previous financial report before the coronavirus truly became a threat, Winnebago reported that as of February 29, 2020, it had $122.9 million in cash and increased its credit facilities by $67.5 million last October. The company had a negative cash flow of $283 million in investing activities in the six months ending February 29, 2020. But given that over $260 million of this figure was due to a one-time purchase of RV manufacturer Newmar, the facts indicate that Winnebago can stay operational for some time with its reserves. That the company announced in May that it would not be revising downward its dividend like so many other companies is another sign of its stability.

Given its ability to grow over the short term and its financial stability, the result is that for day traders looking for a quick buck, Winnebago could be a good buy. Get the stock now, wait for it to announce its results, see the stock rise, and then dump it afterwards. But what about those thinking about it as a long-term investment?

That is more difficult, because the causes for this demand in RVs are unlikely to last. The coronavirus will eventually go away, possibly in a few months to a year. Gas prices will return to their new levels. What will happen to RV owners then? Will the people who bought RV because it seems like a safer alternative to flying still want to keep them, or will we see a glut in the RV market from people trying to dump them?

The comparison here should be with Amazon, Netflix, and the large tech companies which have been major winners from the coronavirus. Amazon has not profited just from increased online sales from people staying home, but from the fact that brick and mortar retailers have been devastated by the coronavirus. Similarly, Winnebago has profited from peoples’ increased reluctance to take the train or plane.

But what happens after the coronavirus? In Amazon’s case, those competing retailers are flat out gone or bankrupt and weakened. But in Winnebago’s case, the major airlines will still be around. They may be in worse financial shape, but it is not like Winnebago will be able to dominate them in how Amazon can dominate competing retailers. There is a real scenario where the Winnebago boom is merely a gold rush, with a resulting fall in share prices in the weeks to months to come.

Short-Term Speculation

There is reason to speculate in Winnebago over the short time with its planned earnings report. Investors could consider a bull spread which will allow investors to cash in if the company beats expectations and limit losses if it fails to do so.

But while there is reason to play around with Winnebago over the short term, this is not a stock investors should consider holding over the long term. While demand for RVs could continue to rise over the next few months, it is just as possible that demand suddenly falls assuming that the coronavirus becomes less dangerous over the next few months to a year. Perhaps there may be another spike in value assuming a second wave, but there is little reason to think Winnebago can sustain its current success past the pandemic.