Editor’s Note: Investment firm Robert W. Baird & Co. met with numerous industry personnel during last week’s National RV Trade Show in Louisville, Ky. The following are comments from analyst Craig Kennison in a note to investors.
Our meetings with manufacturers, dealers, suppliers, and creditors validated our concerns that the winter months will be difficult. Despite compelling values in some instances, we remain on the sidelines. Despite lower gas prices, we do not anticipate a recovery until consumer confidence rebounds, which may coincide with improved wealth (homes and stocks).
• Attendance down: Attendance fell nearly 40% as the industry braced for a difficult market.
• RVIA anticipates tough 2009: Economist Richard Curtin expects towable unit shipments to fall 23% in 2009 to 148.7K and motorhomes to drop 32% to 18.7K.
• Dealer inventory and credit problems: Dealer inventory is aging rapidly, forcing lenders to work with dealers to avoid repossessions. Bank of America said inventory days are up to 200-250 days from 160-180 days last year. Although inventory units are down, the aging problem prevents many dealers from ordering more inventory, hurting manufacturers and suppliers. Incrementally, we’ve learned that Thor Credit intends to fund consumer loans by selling through whole loan brokers, with plans to book perhaps $150 million annually ($6-8 million at risk).
• Focus on survivors: We believe things will get worse before they get better. We expect the winter to take more casualties as dealers and manufacturers face liquidity problems. Desperate manufacturers are discounting aggressively to convert inventory to cash, sometimes below cost. Meanwhile, stronger competitors like Thor are willing to take less now to force weaker players out. To the extent a larger manufacturer fails, we would not expect survivors to benefit for several quarters as dealers clear excess inventory. Among companies we cover, Thor ($178 million net cash) and Winnebago ($21 million) are positioned to survive. Drew Industries (not covered), the leading RV supplier, also seems positioned to weather the storm.
• Outlook: We remain cautious despite compelling values among some RV stocks. Down the road, we see promise in the tough decisions many companies have made to reduce capacity. With lower break-even levels, we expect the survivors to generate solid financial returns if the market recovers even half the volume it has lost. Keys to the recovery remain improved consumer confidence, wealth creation (homes and stocks), and low interest rates.