Weekly Equity Idea Highlight - 2018 07 11
Even after the company's recent strong stock performance, current market expectations for WGO are overly pessimistic. Markets expect UAFRS-based (Uniform) ROA (ROA') to only reach prior cycle trough-levels going forward, even as analysts are forecasting sustained ROA' improvement, in line with the company's historical profitability levels. Also, the company has a positive age-wave related macro-trend likely driving fundamentals and sustained growth, thanks to more baby-boomers becoming retirees, a group that tends to be stronger buyers of RVs, spelling stronger fundamental upside. Finally, while markets are not expecting operational improvements, the company has been able to use their patience in terms of their capital structure to make a smart acquisition and take on new leverage to help give further operational and growth improvement opportunities to the business. All these factors point to fundamental improvements for the business the market is not pricing in.Management alignment and confidence in recent calls point to reasons to believe in further operational improvement. Management is specifically compensated to focus on ROIC improvement, in line with analyst expectations, as opposed to market expectations, for ROIC going forward. Also, management has had confidence in their most recent earnings calls about their outlook for operational improvements, including around fixed cost leverage improving margins, operating margin guidance, around input cost management, and around strategies for their positioning of the business. These markers show the management team executing on operational initiatives that the market is not giving them credit for.
Considering low market expectations, in terms of pessimism for both growth and Adjusted ROA recovery, positive tailwinds and management's alignment and confidence about improving fundamentals for the business and about positive growth trends, current low equity valuations appear unreasonable, spelling potential for equity upside.
Winnebago Industries is a manufacturer with a portfolio of recreation vehicles and marine products used primarily in leisure travel and outdoor recreation activities. The company's reportable segments include: Towable, which is comprised of products which are not motorized and are generally towed by another vehicle as well as other related manufactured products and services; and Motorhome, which is comprised of products that include a motorized chassis as well as other related manufactured products and services. The company's subsidiary, Chris-Craft USA, Inc., manufactures and sells boats in the recreational powerboat industry through a network of independent authorized dealers.
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