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This Stock Looks Really Cheap, Until You Look Under the Hood

The lure of actually living on the open road is a big attraction to recreational vehicle owners. But you really have to want to pay $600 to fill your RV gas tank for that trip to Vegas.

So, is there money to be made in the recreational vehicle sector as an investor? Real Money Columnist Jonathan Heller is adding up the pros and cons, with Winnebago (WGO) – Get Winnebago Industries, Inc. Report as a stock purchase in mind.

“Recreational vehicle manufacturer Winnebago is a potentially interesting situation,” Heller wrote recently on Real Money. “In fact, it is a value-investors dilemma. On paper, if you just look at the fundamentals, it appears to be a screaming buy.”

He adds, “hHowever, there is more to this story that needs to be considered before deploying capital.”

Heller lays out the financial background on WGO to help make the case for investors.

“WGO shares are down 26% year-to-date, and it trades at just 4.5x this year’s consensus estimates (FY ends in August), and it garners fairly wide coverage by 10 analysts for a company of its size,” he noted. “The company has been in the black for the past seven consecutive quarters, and boasts an 8% net profit margin for the trailing 12 months.”

The balance sheet is not bad either.

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“The company ended its most recent quarter with $135 million in cash and $537 million in debt, for net debt of $402 million, less than you might think for a manufacturer,” Heller added.

Industry-wide, demand has been very strong for RVs throughout the pandemic.

The company “reported better than expected second-quarter results with revenue of $1.16 billion beating the consensus by $60 million, and earnings of $3.14 [a share] better by 23 cents,” he added. “The backlog for towable products rose 55% to $1.9 billion, while the motorhome backlog rose 22% to $2.2 billion. Yet the market rewarded WGO shares with a post earnings 12% share drubbing.”

The earnings picture for 2023 is not quite as bright as it is this year, although the stock is trading at just 5.5x forward earnings.

“That’s still ridiculously cheap, assuming the company can meet those expectations,” Heller said. “Gas prices are a weight at this point, and the extent to which prices remain at current levels or climb further could impact revenue. While the company does manufacture vehicles that get 20 mpg, a prolonged bout of higher energy prices would likely render consumers less likely to buy an RV.”

In addition, a protracted bout of inflation could drive RV prices higher. WGO raised prices 7% on 2022 models. “Then there’s the prospect of a recession, which would likely curtail demand, may also be a weight,” Heller said.

WGO is a great example of “cheap on paper”, but perhaps not so much in this ever-changing economic environment.

“At least, the level of uncertainty needs to be recognized and considered,” he added. “Current short interest stands at just under 14%, so that’s a number I will be keeping an eye on.”

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