We initially covered Winnebago Industries (WGO) in August, 2018 and, since then, the stock has almost doubled in price, riding a wave of demand that resulted from behavior shifts in the 2020- 21 pandemic, recalls Doug Gerlach, editor of Small Cap Informer.
But the highway isn’t over for Winnebago. Long-term trends suggest that the company has plenty of room to continue along its growth trajectory and is worth a look at its current valuation.
In the near-term, demand for RVs means that dealer inventories are exceptionally low while demand is high. At Chris-Craft, the luxury boat builder that Winnebago acquired in 2018, dealer inventories are at a 20-year low and the company expects it will take 18 months to refill.
In the long-term, research indicates that potential customers are not the retirees and seniors long associated with the RV lifestyle. 55% of new campers since the pandemic are millennials, while 68% of consumers under the age of 55 participated in an outdoor activity in 2020.
Some 58% of new campers are interested in RVing, and 68% of current RV owners plan to buy another vehicle within five years, with most desiring a new RV.
Since 2011, Winnebago has grown sales at a steady average 19.0% a year, with EPS growing an average 16.8% in the same period. We are projecting EPS and revenue growth at an average 12.0% rate through 2025. The current long-term analyst consensus EPS growth rate is 15%, so this may be a bit conservative.
Free cash flow is very strong, supporting earnings and providing flexibility for capital expansion. Return on equity has consistently been above 20% (except for the pandemic year of 2020).
Winnebago’s P/E ratio has fluctuated significantly in the past decade as the company has remade itself and expanded its business base.
We’re ratcheting back the higher P/E ratios of the past and using 13.3 as our expected future high P/E. Our future high price is then calculated at $165. On the downside, the stock has often bottomed around 9, so our low P/E is 9.3. Using trailing 12-month EPS of $7.04, a low price of $65 is calculated.
Since the current price is $68, we have slid the low price 20% down to $55. From the current price of $68.75, a reward/risk ratio of 7.0 to 1 is suggested. Including a modest dividend, the stock could deliver a total annual return of 20.5% through 2025.
