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Don’t expect the bumpy ride that RV stocks have experienced on Wall Street this year to smooth out until interest rates settle down and consumer confidence stabilizes.
At least, that’s the indication from the investment community, which follows the RV industry and has grown methodical in taking the pulse of the industry and guiding their clients accordingly.
As the summer and chief selling season of 2006 wind down, rising interest rates and consumer confidence have trumped the demographics which otherwise bode well for the industry’s future. How else to explain an industry’s plight that seems to have so much going for it:
* Its “sweet spot,” the aging Baby Boomer market of 55-64-year-olds, is growing by 350,000 people each month and is expected to grow at the rate of 48% by the year 2010.
* Boomers age 55 or older comprise just 27% of the U.S. population but control 75% of the nation’s wealth.
* RV wholesale shipments through June were up 14.3% year-to-date compared to the industry’s best year in a quarter century.
Despite all this, the investment community views the RV industry as if it were on steroids.
“Consumers are slowing down,” Tim Conder, an analyst with A.G. Edwards & Sons, told Reuters news service. “They’ve tapped their home-equity lines of credit. Rates have gone up. They’re paying more at the gas pump. They’re tapped out.”
Bob Simonson, an analyst with William Blair & Co., agreed and said the pullback by consumers was moving beyond the drop in demand for pricey adult toys like boats and RVs.
“We’re on the verge of something that, if it isn’t a recession, is going to feel like one when we’re done,” he said. “It’s the most discretionary and higher-priced items that go first. They’re the canary in the coal mine.”
Wall Street has been bearish toward that “canary” since springtime. The price per share of the 15 stocks regularly tracked by RV Business magazine for its readers has fallen by 12% in the three-month period following April 20. And the stocks of just three OEMs, Thor Industries Inc., Skyline Corp. and Featherlite Inc., closed on July 20 higher than where they stood at the start of the year.
Over that time period, the Dow closed 4% lower, while the Nasdaq closed 12% lower.
Even what would seem on the surface to be good news, such as in early July when the Recreation Vehicle Industry Association (RVIA) reported that May towable shipments were up 20% from a year ago, one analyst turned that into a negative and the market for RV stocks turned downward.
Edward Aaron of RVB Capital Markets caused the stir right after July 4 when he said in a client note that strong increases in towable shipments indicate that dealers are raising their exposure to towables, despite slowing retail trends. RV stocks, including industry leader Thor Industries Inc., fell on his analysis.
John Diffendal, a certified financial analyst with BB&T Capital Markets sounded much of the same tone in his market letter in late July, after RVIA reported wholesale shipments of travel trailers were up 23.3% in June.
“The primary takeaway,” he wrote, “is that travel trailer strength continues, which further intensifies the fears that the industry has overshot the mark on production in the face of weaker retail numbers. May retail towables data was up only 0.2% with travel trailers up 2.7%, and fifth wheels down 3.4%. We believe the obvious fear is that the industry will have to intensify discounts to clear rising inventories and overcorrect on a production basis.”
Indeed, it is clear that the RV industry is in “a down cycle” in the eyes of Wall Street, even if some companies are recording good years, said Jeff Lambert, president of Lambert, Edwards & Associates, a Grand Rapids, Mich.-based consultant to the industry.
Lambert said Wall Street has become astute at looking beyond mere wholesale shipment figures, which through June were up 14.3% from a year ago, and lean heavily on their own private analysis and other, more telling industry numbers, such as retail registrations compiled by Statistical Surveys Inc. Those numbers showed registrations (retail sales) of motorhomes fell 11% in May, and 13% year-to-date, marking the 15th consecutive month of lower retail volume, while towables were up 0.2% in May and 0.9% year-to-date.
“The investment community doesn’t think the RV industry will turn around until the end of this year, if you look at current valuations,” he concluded.