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Stock Strategist

Motor-Home Manufacturer Poised to Gain 20%

We think this RV maker will have a nice tailwind.


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Winnebago Industries
Moat: Narrow |  Risk: Average  |  Price/Fair Value Ratio*: 0.76  |  Three-Year Expected Annual Return*: 20.8%

What It Does:  Winnebago Industries (WGO) manufactures and sells Class A and Class C motor homes along with customized specialty vehicles and parts and services. Headquartered in Forest City, Iowa, Winnebago employs about 3,200 people and has been producing RVs for almost 50 years. Winnebago's sales are approximately $900 million. Class A motor homes accounted for about two thirds of revenue, and small Class C motor homes make up most of the remaining one third. U.S. sales were 96% of revenue in fiscal 2006.

What Gives It an Edge: For the motor home market, Winnebago is the overall leader, with nearly a 20% share. The company enjoys excellent relationships with its dealers, and is the only manufacturer to win the Recreational Vehicle Dealer Association's Quality Circle award every year since the award began in 1996. Morningstar analyst David Whiston thinks the combination of solid market share, high brand equity, and a strong dealer network provides Winnebago with a narrow economic moat. Whiston compliments the firm's management team for making intelligent strategic decisions, including its avoidance of expensive acquisitions solely for market share gains.

What the Risks Are: Whiston notes that demand for motor homes is cyclical and subject to numerous exogenous factors including gas prices and access to capital for consumer loans. Winnebago is dependent on the Detroit automakers, which have a history of ongoing labor problems. Work stoppages at these suppliers could disrupt Winnebago's supply chain and negatively affect its ability to meet dealer orders.

What the Market Is Missing: Whiston believes the market is overreacting to high gas prices while ignoring Winnebago's customer demographics and overall positive industry dynamics. According to The Recreational Vehicle Industry Association report, more than 20% of all U.S. households plan to purchase an RV, and 67% of current RV owners plan to buy another one at some point in the future. Industry research also suggests that the RV business is benefiting from an influx of younger consumers: The number of customers between the ages of 35 to 44 has increased to 2.1% of U.S. households in 2005, from 0.7% in 1993. Whiston believes Winnebago's brand equity should help the firm capitalize on these favorable trends and allow it to capture a greater market share.

* Price/fair value ratios and expected returns calculated using fair value estimates, closing prices, and cost of equity estimates as of Friday, Sept. 21, 2007.

Alex Morozov does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.