LCI Industries Diversification Strategy Pays Off

Key Points

• LCI Industries had a weak quarter and posted a wider-than-expected loss. 
• Industry normalization is expected to occur this year and help sustain the dividend. 
• Diversification into adjacent industries is helping to soften the downturn.

LCI Industries NYSE: LCII Q4 headline results give reason to worry, but the worry is largely misplaced. The company experienced a sharp contraction in business and a sharper contraction in the margin that hurt results for this quarter but set it up for smoother sailing for the remainder of the year.

A rapid deceleration of capacity drives the downturn in the RV business among America’s and the world’s RV manufacturers. The sharp margin contraction is due to the company’s quick action to “flex” its workforce. 

What that means for LCI Industries is a sharp increase in severance and related payments that won’t recur in future quarters and the labor force has been right-sized for today’s market. Ultimately, as bad as the Q4 bottom line looks, profitability is still on the table and the dividend payment should continue uninterrupted this year. 

“Though we faced headwinds, primarily in the fourth quarter, as OEMs implemented production shutdowns, the diversification of our businesses and actions to flex staffing helped mitigate the impact on earnings. We expect these efforts will limit margin pressure as we move through 2023. Still, we did incur severance-related and inventory reserve costs in the fourth quarter,” said Jason Lippert, CEO of LCI Industries. 

LCI Industries Diversification Pays Off 

LCI Industries is focused on the RV industry but has been working on building business in adjacent OEM industries such as marine. This effort by no means offsets the 50% contraction in RV OEM activity that is being reported, but it does help. The $894.3 million in revenue is down only 26.1% because of growth in this segment. The RV OEM segment, the core segment, declined by 40% while the Aftermarket segment fell by 17%. 

“Our team’s deep industry knowledge and experience navigating fluctuating production schedules will guide us in 2023, during which we anticipate production levels will normalize,” Lippert said. “Although we expect strong organic growth within RV, we believe this down cycle will be different than the last as our marine, adjacent and aftermarket markets continue to support our diversification strategy.”

The worst news in the report is the margin which contracted at the gross and operating levels. The gross margin contracted by 800 basis points on deleveraging and rising costs, while SG&A increased as a percentage of revenue by roughly 500 bps. This was more than enough to drive a loss for the quarter and 1 that was larger than expected.

The GAAP -$0.68 missed by $0.30 in what is historically 1 of the 2 weakest quarters of the year. The company does not give guidance but the consensus estimates, which factor in a 40% decline in earnings, are still more than enough to sustain the very healthy dividend. 

LCII Pays A Healthy Dividend 

LCII pays an attractive dividend because it yields more than 3.5% while costing less than 8X earnings. What makes it a comfortable dividend is that payouts are less than 20% of 2022 earnings and less than half the outlook for 2023. In this light, the company may slow the dividend increases, but payments do not appear to be in danger of cutting or suspension. 

Turning to the chart, LCII shares are down following the report but appear to have found the bottom already. The price action returned to the short-term 30-day EMA, which produced a strong bounce. This bounce confirms support at the $110 level and suggests the price action will continue to move sideways if not higher.