RV stocks: A comfortable way to ride falling interest rates

Key Points

• RVIA industry data points to normalization and return to growth in calendar 2024, with acceleration in the back half. 
• Leading RV manufacturers sustain solid cash flows despite this year's slowdown and pay investors to hold their stock. 
• LCI Industries is the high-yield play supported by diversification into OEM and aftermarket sales. 

RV stocks have been struggling to regain traction following the social-distancing craze that drove them to record highs. The problems were rising prices and an inventory glut compounded by high interest rates. 

Now, data from the RVIAA suggests that industry normalization is at hand, and growth will resume in 2024. This outlook will be compounded by falling interest rates and increasing affordability, providing a path to higher share prices for these and other consumer discretionary stocks.

Data published by the RVIA in its Winter 2024 RV Roadsigns report suggest 11% to 16% growth in 2024. This pace outstrips growth expectations for the four leading RV manufacturers and Camping World at the low end of the range. This sets them up to outperform in 2024 while delivering solid capital returns to investors. 

Winnebago has a mixed quarter and gives cautious guidance 

Winnebago Industries Inc. NYSE: WGO had a mixed quarter, with top and bottom lines diverging from consensus in different directions. 

However, the takeaway from the report is that the year-over-year (YOY) decline aligns with the industry shipment reports and forecast; it is shrinking sequentially, and guidance is optimistic that growth will return in the second half of the year. Until then, the company's cash flow has been impacted by deleveraging but is still sufficient to sustain operations, pay dividends, and repurchase shares while maintaining a fortress balance sheet. 

Winnebago does not have a high yield of 1.65%, but it has a reliable payout of 15% of earnings and has a positive outlook for distribution increases. Distribution increases may not remain as robust as the 17% CAGR the company is running, but they are expected. 

As it is, Winnebago returned $50 million in FQ1 in dividends and share repurchases while leverage remains well below 1x equity and 0.5x assets. Winnebago is also investing in technology to help with automation and efficiency (AI), so it should be able to regain and potentially exceed prior earnings leverage as the year progresses. 

Thor Industries hammering down on guidance

Thor Industries NYSE: THO outlook is better. The company's FQ1 results were, as expected, at the top line, down 20%, compounded by better-than-expected earnings and reaffirmed guidance. Guidance expects a significant uptick in business during the second half as channel destocking and demand come into alignment. 

Along the way, Thor will continue to work on its operational quality and margin improvement. Execs expect the consolidated gross margin to improve by 20 to 70 basis points by year-end. Shares of THO yield about 1.6%, trading at 17x earnings. The company repurchased $30 million of shares during the quarter, with YTD repurchases reducing the share count by 1.4% compared to last year. 

LCI Industries sells to OEMs and the aftermarket

LCI Industries NYSE: LCII FQ3 results were weak on the top and bottom lines but revealed the strength of its diversified nature. The company's 15% decline is far better than the 20% posted by Winnebago and Thor Industries because of exposure to the OEM and aftermarkets. The OEM business is lagging but is offset by strength in the aftermarket because all the RVs sold over the last three years need stuff. 

Because the aftermarket segment grew to exceed 50% of the business, we can expect it to continue outperforming over the next year and get a boost from improving OEM demand. LCII is the most highly valued RV stock, trading at 42x earnings relative to this year's weak results. That valuation falls sharply to 18x compared to next year's outlook, which includes recent acquisitions and the expected RV industry rebound. 

LCII also pays the highest dividend apart from Camping World, about 3.2%, with only minor concerns. The payout ratio 2023 is above 100% but backed up by a robust balance sheet and expectations for future earnings.