Winnebago Industries

Winnebago's stock rose over 14% in June 25 trading even though fiscal third-quarter adjusted diluted earnings per share of $0.66 missed the $0.76 LSEG consensus. Management also cut full-year guidance to $1.65-$2.00 in adjusted EPS from $2.10-$2.80 on revenue and input cost pressure.

Why it matters: Recreational vehicle industry investors continue to wait for an uptick in dealer demand to help manufacturers' top lines. Macroeconomic pressures such as high oil prices caused hesitation for dealers and consumers in the quarter. High-end and budget-conscious buyers are in the market, but many middle-market consumers remain on the sidelines. This hesitation caused management to cut its calendar 2026 North American industry wholesale forecast by 9% at the midpoint to 300,000 units. Despite revenue down 9.9% year over year and a 26.5% towables volume decline more than offsetting a 7.1% motor home unit increase, we think the stock rose on gross margin being down only 10 basis points to 13.6%. Price increases on some models mitigated some volume and cost pressure.

The bottom line: We are lowering our fair value estimate for no-moat Winnebago to $73 per share from $76. The change is from lowering revenue over our five-year explicit forecast period by 6.8%. We expect dealers to remain cautious on ordering inventory, especially for towables, into at least early fiscal 2027. Fourth-quarter commentary on the call was for revenue to be down from the third quarter and margin down slightly as well. Cost-control efforts and the benefit of pricing for the 2027 model year are apparent in guidance for roughly flat year-over-year margin despite sales down by double digits. We consider Winnebago's stock to be quite undervalued but think that it will remain that way for a while, until dealers show more optimism in ordering patterns. By fiscal year-end, the company expects net leverage to fall to the mid-2 range from 3 times adjusted EBITDA at May 30.

We are lowering our fair value estimate to $73 per share from $76. The change is from lowering revenue over our five-year explicit forecast period by 6.8%. We expect dealers to remain cautious on ordering inventory, especially for towables, into at least early fiscal 2027. We model compound annual revenue growth of about 4% across fiscal 2026-30, down from just over 5%. Dealers remain concerned about high interest rates affecting their inventory carrying costs and consumer confidence. US tariffs could severely harm US consumer discretionary spending and have raised Winnebago’s input costs for items such as some of its chassis purchases. Our midcycle operating margin remains about 9% to reflect higher gross margin potential over time as management works toward midterm goals.

Our midcycle fiscal 2030 gross margin is about 15% to capture upside and downside profit levels over time, per our methodology, but we model about 18% in fiscal 2029. We model operating margin to average over 7% across our five-year explicit forecast period. We believe North American RV industry demand remains sluggish but not terrible despite falling from record levels, because fiscal 2022 company backlog levels of over $4 billion were abnormally high due to a surge in demand from the pandemic. The company no longer discloses backlog. Our expectation of continued strong demand, as the pandemic has led to Americans seeking more outdoor experiences, the company’s cost-reduction efforts in restructuring the motor home segment, and the expansion of Grand Design into motor homes in late fiscal 2024, justifies our modeling assumptions.

Our five-year CAGR for revenue is about 4%, with midcycle year revenue of about $3.4 billion, down from about $3.7 billion. EBIT margins in the past typically ranged from around 5% to about 10%, depending on where the firm was in the economic cycle. Fiscal 2025's mark was only 3%, but fiscal 2021 was 11.1% and fiscal 2022 was 12.6%. Further manufacturing efficiencies and operational improvements from a new enterprise resource planning system in 2018, expanded product offerings, towables growth from Winnebago brand towables and Grand Design, and outdoor lifestyle acquisitions in and out of RVs such as Chris-Craft and Barletta boats and Newmar motor homes suggest to us that there is margin expansion potential not available under prior leadership, so upside potential exists to our valuation. The company is less exposed to cyclical risk than during the Great Recession, when it only sold motor homes, because towables typically do not fall as hard in volume in downturns as motor homes, and the firm's cost structure is about 85% variable. We assume capital expenditures averaging around 2% of sales during our five-year forecast. Our weighted average cost of capital is slightly below 10%.

In fall 2023, we downgraded our moat rating for Winnebago to none from narrow. We now believe that the recreational vehicle industry has been unable to develop sufficient barriers to entry to prevent new players from entering the market. As seen with the relatively young age of Grand Design, a competitor can enter and slowly take share to the point that they might be acquired, just as Grand Design was purchased by Winnebago. RV producers face cyclical demand plus tough competition, and we believe these firms operate in an even more cyclical sector than traditional automakers. Although RV producers appear to face less competition than their counterparts in the general auto manufacturing industry, as evidenced by the oligopolistic nature of the RV industry with three manufacturers consistently accounting for roughly 90% North American market share, we attribute this dynamic to the much smaller market size of the industry as opposed to any maintainable competitive advantages. For example, North American RV shipments peaked in calendar 2021 when the industry wholesaled over 600,000 units. However, 2023 shipments were 313,174—the lowest since 2012—as the industry unwound its massive pandemic-fueled backlog. 2024 RV shipments were 333,733, 2025 wholesales were 342,121, and 2026 may be in the low 300,000 to just under 300,000 range. Comparatively, US light-vehicle sales are generally 16 million-17 million units a year.

Despite Winnebago’s size, at number three in North American market share, we do not believe it has established adequate scale to warrant a cost advantage relative to competition such as Thor Industries and Berkshire Hathaway-owned Forest River. RV makers experience significant production delays due to constraints in the supply chain from time to time and must compete against other vehicle manufacturers for key parts such as semiconductors, chassis, and engines. Many of the other manufacturers buying these parts are larger than Winnebago, can be outside the RV sector, and carry much greater bargaining power that prevents Winnebago from achieving any meaningful cost advantage, in our view.

Before the pandemic, Winnebago’s return on invested capital including goodwill had been declining from the low 20s in fiscal 2015-16 to about 12% in fiscal 2019 as the company restructured its motor home segment while increasing goodwill with acquisitions. Although ROICs improved to as high as about 35% in fiscal 2022, we attribute this dynamic to a pull-forward in demand as consumers were eager to get outdoors during the pandemic and, in some cases, wanted to take advantage of increased remote work flexibility. As the pandemic backlog got filled in fiscal 2023 and fiscal 2024, ROICs declined significantly from pandemic levels to just 7.5% in fiscal 2024 and 4.2% in fiscal 2025. We forecast ROICs below our weighted average cost of capital through fiscal 2027 but expect the firm to generate economic profit after that time. We project a midcycle ROIC of about 12.5% in fiscal 2030, our midcycle year, as we expect a normalized demand environment will lower future returns relative to pandemic levels. Despite modeling ROIC exceeding WACC on a consistent basis starting in fiscal 2028, in this case we don’t consider that enough to award a narrow moat due to the challenging industry dynamics.

The Grand Design acquisition materially raised Winnebago's operating margin, and future deals could do the same.

The company's strong balance sheet provides financial strength and flexibility to withstand cyclical downturns.

Because RV consumers are relatively affluent, rising gas prices would probably not hinder a consumer's ability to purchase a motor home. A 2016 study by travel consulting firm PKF found that for a family of four, gas prices would have to exceed $12 a gallon to make RV travel more expensive than other forms of travel.

Management's desire to keep making acquisitions could prove to be a poor use of capital.

Demand for motor homes is historically cyclical and can be influenced by factors outside Winnebago's control, including interest rates, employment, gas prices, and gross domestic product growth. This cyclicality makes the stock price extremely volatile.

Fuel prices could increase or remain volatile, affecting consumers' ability or their desire to purchase RVs, even as Winnebago brand motor homes are suffering from discounting pressures and quality-control issues, which in turn hurt warranty costs.