Picture the owner of a recreational vehicle and you might think of Robert De Niro stepping out of his Fleetwood Coach motor home in the 2004 comedy Meet the Fockers. Retiring baby boomers remain the predominant buyers of RVs, but there has been a new kid on the block in recent years: the budget-conscious-but-experience-hungry millennial. The rising generation is powering U.S. RV sales to levels not seen since the 1970s.
Thor Industries (THO), whose RV brands include Airstream, Keystone, and others, and Winnebago Industries (WGO) are riding the trend. The manufacturers have diversified their product lines to offer a wide range of towable and motorized RVs, at prices from $10,000 to more than $1 million.
Over the past 25 years, the average age of an RV buyer has decreased to 48 from 60, according to data from the RV Industry Association. RV shipments have grown for the past eight years, from a financial-crisis low of 165,700 units in 2009 to 504,600 in 2017.
Baby boomers are helping to boost the numbers, says RVIA President Frank Hugelmeyer. “But it’s really families and the millennials moving into the market that has taken us into a period where we’ve had the two best years on record for the industry....Millennials go out camping in groups of 10 to 20, and so it’s becoming a very strong social movement.”
Thor probably generated $8.3 billion in sales for its fiscal year ended in July, and Winnebago probably produced nearly $2 billion of its own for the fiscal year ended in August, an impressive comeback from its near-death experience during the Great Recession. Both companies are likely to generate 20%-plus earnings growth, to $445 million and $102 million, respectively.
Until recently, the trend has sent RV-industry stocks soaring. Thor and Winnebago, the two pure plays in RV manufacturing with over 60% of the market, tripled in value from 2016 to early this year. Investors have also piled into components suppliers Patrick Industries (PATK) and LCI Industries (LCII), and RV dealer Camping World Holdings (CWH).
But the boom is feeling more like a bust of late. Camping World and other smaller dealers were overly optimistic with orders late last year. “You had dealers saying, ‘I’m not going to be left behind, and I’m going to buy more product,’ and that’s exactly what they did,” says Kathryn Thompson, CEO of Thompson Research Group, which advises investors on the construction and materials sector.
According to RVIA manufacturer surveys, RV industry shipments grew 29% year over year in September 2017, followed by 26% in October and 20% in November, as dealers stocked up in anticipation of high retail demand.
But a cold winter that extended into the spring selling season interrupted the excitement. Reduced foot traffic to dealerships left their lots with excess inventory. By March, growth in RV shipments from manufacturers to dealers had fallen to 8% year over year. The growth turned negative in May and June, although it recovered to 11% in July, a seasonally low month for sales. That has been an unwelcome reality for RV stocks that were priced for another year of 20% shipment growth.
Executives at Thor and Winnebago were unavailable to comment.
U.S. trade policy hasn’t helped matters, particularly tariffs on steel and aluminum, which threaten RV manufacturers’ margins. Thompson estimates that the metals account for 15% to 20% of their raw material costs. Meanwhile, rising interest rates and higher fuel prices have increased the cost of RV ownership. Suddenly, the outlook isn’t looking so pretty: Thor has fallen 36% year to date; Winnebago is down 32%; and Camping World, the biggest loser, is off 55%.
The RVIA has reduced its forecast for shipments in 2018 to 505,900 units from 540,000, slightly ahead of the 504,600 units shipped in 2017. Northcoast Research analyst Seth Woolf estimates that it will take at least through the end of 2018 for dealers to pick up their ordering again, signaling a couple more painful quarters for RV makers and their component suppliers.
“There’s a good long-term story with younger consumers, and you can have this dynamic where they buy entry-level units and then spend 20 or 30 years moving up to higher-margin units,” Woolf said. “Unfortunately, the stocks won’t work near term until the inventory overhang is clear.”
Later this month, everyone with a stake in the RV industry will gather in Elkhart, Ind., for the annual Elkhart Open House. Roughly 60% of all RVs on the road today are manufactured in the northern Indiana town, which is home to Thor, Patrick, LCI, and the RV hall of fame.
Last year, the Open House accounted for over $2 billion worth of orders for the newest RV models, or more than 10% of the industry’s 2017 sales. This year’s show is unlikely to produce the same results, and the stocks probably won’t recover until the market digests the Open House disappointment.
While it looks too early for the value players to swoop in and buy the RV and parts makers, Camping World may rebound sooner. The company, which had an initial public offering in 2016, operates 145 dealerships in 36 states and had $4.3 billion of sales last year. Some 40% of its business comes from parts, financing, and other servicing revenues, which carry high margins and are driven by RV usage, not sales. Camping World stands to benefit most from manufacturers’ increased capacity, as it’s now able to order new units more quickly in response to demand. It’s also buying into the millennial trend, focusing sales and marketing efforts on lower-priced towable trailers and de-emphasizing big motor homes.
Camping World CEO Marcus Lemonis (who hosts CNBC’s The Profit) has been pursuing a roll-up acquisition strategy that should boost the dealership’s leading 15% market share. The company aims to double the number of dealer locations in the next five years. As those acquisitions are incorporated, earnings should accelerate: Analysts expect 30% growth next year. The stock trades for just 6.9 times 2019 projected earnings. While sentiment surrounding the RV industry may continue to weigh on Camping World shares in the near term, fundamentals should shine through over time, turning investors into happy campers.
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