RV Stocks Look Attractive Following Recent Decline

Susan Goldman/Bloomberg News.

Investors in the growing recreational vehicle sector had reason to feel optimistic prior to a recent decline. Shares of the two best-known U.S. RV stocks, Thor Industries and Winnebago were up 170% and 180%, respectively Shares of Thor and Winnebago over the past two years. Shares of leading retailer Camping World Holdings had doubled in price since its 2016 IPO. But then, at the end of 2017, all three of these stocks fell out of bed. Shares of both THO and WGO have lost more than a third of their value, while Camping World Holdings was down by more than half.

Despite concerns about steel and aluminum tariffs, demand for RVs remains strong. While interest rates and hence borrowing costs are up, the main reason for the weak share prices appears to be that valuations had gotten ahead of where they should have been, particularly in light of an industry characterized by booms and busts. Further, improving consumer confidence and RV sales to younger buyers appear to have re-ignited these stocks and a full blown rally may be afoot.

Specifically, far from a bust, the industry is booming. Shipments of RVs in the U.S. rose by 17% in 2017 and total sales doubled from 2011. That strength continued into 2018, with RV shipments up to ~51,000 in March, the best on record according to the RV Industry Association and the first time monthly production has surpassed 50,000 units.

Turning to the stocks, Thor Industries reported that its pretax income increased by more than 50% and that its order backlog (an important indicator of future demand) increased by 34% in its second quarter. Analysts at BMO Capital Markets upgraded the shares to Outperform recently and said a recent drop in the share price is overdone given the fundamental strength of the RV industry.

Meanwhile, Winnebago posted 45% higher net income and management said that demand remains strong and that it is benefiting from solid growth in retail sales. Because its customers are typically upper income, higher gas prices should not seriously impact its sales. Analysts at BMO Capital Markets expect demand from both an aging population and millennials to boost sales.

Polaris Industries (PII) has a long operating history and is among the best known brands in so-called powersports (i.e. off-road vehicles, motorcycles and snowmobiles). Driving the company’s strong brands are its innovative products, including the Slingshot three-wheel motorcycle. Another positive for investors has been the recent success of its Indian Motorcycles, which have been taking market share from Harley Davidson. Indian motorcycles are attracting younger bikers who have no attachment or loyalty to Harley Davidson. Analysts at Wells Fargo expect Polaris to also gain share in the market for off-road vehicles.

Following slightly disappointing earnings, shares of Camping World Holdings appear more reasonably priced. Its first-quarter sales rose 20% to more than $1.0 billion and were above consensus. CWH earned much higher profits from finance and insurance than it did from actual sales of RVs. Adjusted earnings missed consensus by just a penny, so the 17% decline in the share price seems overdone. Even if the RV industry weakens, customers will continue to need insurance and financing and buy second-hand RVs. Analysts at Wells Fargo expect CWH’s size, scale and superior selection to enable it to gain market share.

Turning to valuation, shares of RV companies trade at a 25% premium to the auto manufacturers, which are growing much less rapidly. Camping World trades at a nearly 40% discount to five retailers that sell outdoor goods. The latter stock appears to offer a very attractive way to benefit from rapid growth in the RV industry.

This article originally appeared here via Google News