baird_new_logoCraig Kennison and his staff at Wall Street’s Robert W. Baird & Co. see a “robust cyclical recovery in the RV sector as the destocking trend runs its course,” but Winnebago Industries Inc. won’t be part of it, at least for the immediate future.

As a result, the firm downgraded its rating for Winnebago to “underperform.” It defines “underperform” as “expected to underperform on a total return, risk-adjusted basis the broader U.S. equity market over the next 12 months.”

In a recent market letter to investors, the firm noted:

  • The motorhome recovery has lagged towables.
  • Capacity we expected to close (bankruptcy) has not.
  •  Winnebago will struggle to achieve profitability in F2010. We still see Winnebago as a quality survivor, but believe shares may go lower.

The Wall Street firm offered this summary

  • Underperform rating despite favorable underlying trends. As our bullish thesis unfolds, we are surprised to see a better opportunity at Underperform, but we believe shares already discount an optimistic scenario. Although we believe: 1) retail is poised to recover, 2) dealer inventory is near a bottom, 3) the inventory replenishment cycle is returning to normal after a massive destocking trend, and 4) Winnebago is a survivor– we see more risk than reward above $14.
  • Better value in Thor. Although Thor reported impressive results recently, it benefitted from: 1) a stronger towable market, and 2) aggressive cost cuts. Indeed, the towable market posted its first positive monthly comp in nearly two years in August (+14%). However, Winnebago operates exclusively in the motorhome market, which fell 33% in August and 50% in the quarter. Meanwhile, Thor trades at 16x $1.50 NTM EPS plus cash ($6/share). Although Winnebago has cash ($1.44/share plus auction rate securities), it is not expected to earn a profit in F2010. (Management sees breakeven around 4,800 units, which would require that shipments more than double from F2009 levels.) Our bull case calls for EPS of $1.00 assuming the market recovers to 35,000-40,000 units (perhaps in F2011 or F2012) – but shares appear to discount that scenario.
  • Winnebago reports Oct 15. We estimate that Winnebago shipped nearly 800 units, generating $65 million in revenue. Our projection assumes retail demand falls 25% and dealer inventory drops to 1,900. We anticipate a $7-8 million loss.