Earnings Watch: Buying the Dip in Winnebago

Key Points

• Winnebago had a tough quarter but was able to maintain pre-bubble business levels. 
• The margins contracted, but adjusted earnings were well above the consensus figure. 
• Institutions own about 95% of the stock, and some bought it on the post-earnings dip. 

Winnebago NYSE: WGO did not issue an excellent report for Q3. The company’s revenue is down 38.3%, and earnings are down more due to increased promotional activity and deleveraging. The company doesn’t give formal guidance, and the outlook isn’t as rosy as last year, but someone is buying the dip.

One reason is the business is contracting from a bubble-induced peak and is expected to stabilize at higher levels. The bubble caused the RV industry to double and then double again, leaving WGO about double its size in 2019 following this year’s contraction. Because the stock is trading near its pre-bubble highs, it looks like a value and pays a healthy dividend. 

Winnebego Has Tough Quarter; Dividend Healthy As Ever 

Winnebago had a tough quarter driven by declining volume demand and an increasingly tough consumer environment. The company posted a YOY decline in revenue of 38.3% which is 560 basis points worse than expected. The decline was driven by a 52% pullback in the Towables and a 27.5% in Motorhomes that outpaced competitor and value-brand Thor Industries NYSE: THO. The Marine segment, pivotal to the diversification strategy, grew by 1.9%. 

The margin news is the most impressive portion of the report, even though it isn’t all that great. The company’s gross margin contracted by 190 basis points, and the operating margin by more, due to promotional activity and deleveraging that is expected to persist in Q4.

The good news is that margins contracted less than expected, resulting in outperformance despite the top-line weakness. The company reported $2.13 in adjusted earnings, down almost 50% compared to last year but $0.36 or 2000 bps ahead of the Marketbeat.com consensus figure. 

The opportunity in Winnebago is in its cash flow and balance sheet as much as in the future. The company has a rock-solid balance sheet with low debt and ample free cash flow. Cash flow fell significantly compared to last year but is sufficient to run at 21% capital return ratio, including dividends and repurchases.

The dividend is only 12.6% of the adjusted earnings and is worth about 1.7% to investors. It’s also growing at a high 16% CAGR, which should continue this year and into the future. The distribution growth rate may slow, but it is not expected to stop. The next increase may come when it reports Q4 results next quarter. 

Tightly-Held Winnebago Could Gain 10%

Winnebago is a tightly-held issue with 5% inside and 95% institutional ownership. The insiders have only sold in the last year, but sales are small, few and far between, while institutional activity is also mixed. The institutions had only bought on balance since the 2020 lows were hit, but that changed in Q2. Total activity picked up but turned bearish on balance. If that turns into a trend, it could weigh on the market as time progresses.

The caveat is that analysts see about 10% of the upside and are still holding. The Q3 results may improve the earnings outlook and keep the analysts in the market, if not attract new institutional money. Ultimately, the stock price could be volatile and range-bound as it has been for the last year. 

Winnebago shares fell more than 8.0% in early trading but quickly found the bottom. The market rebounded strongly to reclaim the loss and return the price to the pre-release levels. This shows solid support for the stock at a critical level, including the 30-day EMA and the mid-point of the range.

Assuming these support levels continue to show buying, this stock could move out of its 12-month range into the upper end of a larger, longer-term range. This stock could gain 30% over the next few quarters to 18 months in that scenario.