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Morningstar | Winnebago Finishes Fiscal 2018 With Solid Numbers

Winnebago Industries finished fiscal 2018 with a good fiscal fourth quarter, including a 19% year-over-year increase in fourth-quarter EPS to $0.94 despite $1.3 million of transaction costs for premium boat maker Chris-Craft that was acquired in June. Results easily beat consensus EPS of $0.91. We are not changing our fair value estimate, but we will be updating our model once the 10-K is filed. Motorhome segment revenue grew 2.5% year over year, and unit volume rose 4.3% thanks to 59% and 11% increases in Class B and Class C deliveries, respectively, offsetting a 27% decline in Class A business. Towables, which contribute the vast majority of earnings and 54% of fourth-quarter revenue, grew revenue and deliveries by 26% and 25%, respectively, and grew adjusted EBITDA by 24% to $8.1 million.

We were also pleased to hear management say it has been able to offset raw material price increases from tariffs via cost reductions and price increases to customers. During the earnings call we asked CEO and president Michael Happe how much more the company can squeeze cost savings and pass price increases on to customers. He said the team is still looking for cost reductions across marketing, SG&A, freight, and anywhere else they can get it. These cost cuts will be key in fiscal 2019 because the RV Industry Association is expecting flat to slightly down RV shipments for calendar 2019 of between 485,900 and 510,600 units, down from an expected 2018 total of 505,900. Winnebago will remain a leading player in our view thanks to its brand equity, but management admitted it can do more in Class A diesel product offerings, thus we see upside opportunities provided the U.S. does not enter a recession soon.

Management did not provide fiscal 2019 guidance but did say it expects another eight-figure gross cost increase from tariffs and indirect effects of tariffs, just like it experienced in fiscal 2018. The company sources nearly all its steel and aluminum from the U.S., so if the Trump administration were to rescind these tariffs or work out a deal to exempt Canadian or Mexican metals, then perhaps that could force American producers to lower their prices and benefit Winnebago. We note, though, that our steel analyst does not foresee an exemption for either country soon.

Chris-Craft, specialty vehicles, and corporate overhead will now be in its own combined segment called "other," so we were disappointed to not see stand-alone detail on the new marine business. The other segment's adjusted EBITDA improved to negative $1.6 million from negative $3.7 million in the fiscal third quarter, implying (by our math) adjusted EBITDA margins for Chris-Craft of about 14% on fourth-quarter marine revenue of $14.6 million. However, these numbers are likely inflated from actual because some of the segment's increase in revenue and profit could be from specialty vehicles. Happe did say Chris-Craft is slightly capacity constrained, which means more unit volume could be realized after Winnebago invests in expansion. We do fear by the time that investment is made, the U.S. may be feeling recessionary concerns, but we like the acquisition long term because Chris-Craft is a premium brand.