The near-term outlook for Winnebago Industries’ motor-homes business is positive, with motor-home backlog revenue for the second quarter of fiscal 2013, a leading indicator, up 167% in dollar terms year-on-year, according to its most recent 10-Q. Winnebago, the only motor-home manufacturer to be awarded Ford Motor Company (NYSE:F)’s “fully meets” classification every year since 1997, should see its quality and brand differentiation drive more sales from both retail customers and dealers going forward.
Despite this healthy trend for motor-homes, I still prefer Thor Industries over Winnebago Industries because of Thor’s greater exposure to towables. Towables typically carry higher margins than motor-homes and are riding on the wave of growth in the sport utility vehicles (SUVs). SUVs are used to tow towables such as travel-trailers and are increasingly popular among the younger generation. Another reason that I am not considering Winnebago is that it does not pay a dividend unlike its peers.
Drew Industries is a key supplier of chassis and certain RV components to Thor Industries, and also has greater exposure to towables vis-à-vis motor-homes with more than 80% of its RV segment revenue generated from towables.
Drew Industries’ growth strategy entails selling a wider range of its products to its existing customers. New RV products, such as entry doors and windows, are either developed in-house or acquired via takeovers of other companies. In addition to RV components, Drew Industries also sells manufactured homes components, which benefit from the increased in demand for affordable housing.
Drew Industries registered a 11% year-on-year growth in revenue for the first quarter of fiscal 2013 due to the overall increase in demand for RVs. Despite this, quarterly net profit fell about 25% year-on-year with higher labor and material costs incurred as a result of expansion efforts.
Drew Industries will have to grow to a sufficient scale before it is able to extract economies of scale to spread fixed costs over a larger base. Furthermore, with the retirement of Fred Zinn as President and CEO, it is worthwhile for investors to monitor the impact of executive succession on the corporate strategy before committing to a position in the stock.
Conclusion
Thor Industries is the best stock to gain exposure to growing demand for RVs, given its status as the world’s largest manufacturer of RVs. Its variable cost structure and management compensation structure reduce the risks of operating leverage and corporate malfeasance, respectively. It is valued at a discount to its peers at 13 times forward P/E and also offers a greater exposure to the more favorable towables segment than its closest listed peer Winnebago Industries.
The article Why You Should Take a Ride With This Stock originally appeared on Fool.com and is written by Mark Lin.
Mark Lin has no position in any stocks mentioned. The Motley Fool recommends Drew Industries. The Motley Fool owns shares of Winnebago Industries. Mark is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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