Should Value Investors Take A Road Trip With RV Makers?

Dreaming of the open road and getting away from it all? How about piling your family into an RV and heading into the sunset? Or how about a nice quiet retirement hopping from one natural wonder to the next? Sounds amazing and I have dreamed of doing just this when I retire and I know I am not the only one. This got me thinking about the Recreational Vehicle (RV) market and what value investment opportunities there might be in RV manufacturing companies.

Idealistic dreams of the open road aside, there are considerations that are needed to ensure that an investment in the RV business makes sense to the value investor. I will be reviewing two of the largest RV manufacturers, Thor Industries, Inc. (NYSE:THO) and Winnebago Industries, Inc. (NYSE:WGO) to identify if these companies are solid value investments.

Investment Thesis

My goal of these articles is to identify quality companies at a fair price and purchase them with a margin of safety to ensure growth of my investment. I will be looking for the following in my analysis:

Do I know or have the ability to understand what the business does? What about the company keeps competitors at bay and ensure longevity? Does the company have quality management who are open, honest, and working in the best interest of the stakeholders? What is the value of the company and can I can buy the company at a price that gives a level of comfort? Criteria 1 �� Understanding the Business

Winnebago and Thor are both leading U.S. manufacturers of recreational vehicles (RV), including motorized and towable options. Thor started in 1980 and is ranked number one by market share with 48% of the market and $7.25 billion in revenues in 2017 and includes subsidiaries including Airstream, Thor Motor Coach, Jayco, Heartland, and Starcraft, amongst others. Winnebago has been in business since 1957 and is ranked 3rd in market share with 6% of the market and revenues of $1.55 billion in revenue and sells under the Winnebago and Grand Design names. Berkshire Hathaway��s (BRK-A, BRK-B) Forest River, Inc. is ranked 2nd in market share.

The Recreation Vehicle Industry Association (RVIA) states that over 9 million people own RVs and there were just shy of 505,000 RVs sold in 2017, which represents a 17% increase over 2016. Demographic changes including more of the population reaching retirement age as well as younger buyers interested in outdoor lifestyles have forecasters expecting the RV industry to grow well into the future.

Source: RVIA.org

The RV industry is considered a cyclical business, with sales fluctuating based on the economy. The growth of the U.S. economy and a reduction in unemployment rates since the Great Recession has helped bolster the RV industry. Forecast growth of the economy in the next few years is expected to remain strong and similar to the past years since the Great Recession of 2008-09. Forecasts show that GDP, unemployment, and inflation for the next three years will maintain a similar pattern as prior years as shown in the table below.

Year	GDP	Unemployment	Inflation
2010	2.5%	9.3%	1.5%
2011	1.6%	8.5%	3.0%
2012	2.2%	7.8%	1.7%
2013	1.7%	6.7%	1.5%
2014	2.6%	5.6%	0.8%
2015	2.9%	5.0%	0.7%
2016	1.5%	4.7%	2.1%
2017	2.3%	4.1%	2.1%
2018 Forecast	2.7%	3.8%	1.9%
2019 Forecast	2.4%	3.6%	2.0%
2020 Forecast	2.0%	3.6%	2.1%

Source: thebalance.com

Historically, the RV industry follows the economic cycle, but a recent trend in younger buyers purchasing their first RV and the aging of the population, which has traditionally been the buyers of RVs, shows that there might be additional demand over the next few years and beyond, even if the economy cools down.

Criteria 2 - Competitive Advantage

For Thor, the size and breath of their subsidiaries is their main competitive advantage, with size and price range of purchase options to accommodate buyers on the entire price spectrum. The company has been actively acquiring additional brands including Jayco in 2016 and Livin Lite RV in 2013.

Winnebago��s competitive advantage is the brand name itself. Winnebago is an American classic brand. When you think of RV, Winnebago comes to mind. Having been in business for over 60 years, the Winnebago name is known to a large number of potential buyers. A recent innovation for Winnebago is the first zero emissions all-electric RV option.

Criteria 3 �� Management

Management effectiveness can be measured using the Return on Equity (ROE) and Return of Invested Capital (NASDAQ:ROIC) listed in the tables below. Both companies have successfully increased both ratios over the years which shows that management has been good stewards of the investor's funds and are using the funds effectively to grow the company. Additionally, both companies are growing without extensive long term debt. Thor has approximately $80 million outstanding and the company intends to reduce that to zero this summer. Winnebago is showing $272 million in long term debt.

Thor Industries, Inc

Thor Industries	2010	2011	2012	2013	2014	2015	2016	2017	5-Year Avg.
Return on Equity (ROE)	16.16	14.23	14.43	17.54	19.14	19.52	22.01	26.34	21.45
Return on Invested Capital (NASDAQ:ROIC)	15.68	13.89	14.18	17.33	19.03	19.44	16.86	22.72	19.92

Winnebago Industries, Inc

Winnebago Industries	2010	2011	2012	2013	2014	2015	2016	2017	5-Year Avg.
Return on Equity (ROE)	10.79	11.48	35.49	20.26	24.79	19.92	18.6	20.09	21.45
Return on Invested Capital (ROIC)	11.85	11.48	36.34	20.97	25.52	19.92	18.6	13.09	19.38

Thor Industries CEO has been with the company since 2001 and has been in the RV industry even longer in various positions. Additional senior management has also been with the company for 7 or more years.

Winnebago Industries Grand Design Brand's CEO has been in the industry for 30 years and the Chairman of the Board has been with Winnebago since 2008.

Criteria 4 �� Value Calculation

As mentioned in my previous article, I will be using a margin of safety valuation model based on Discounted Cash Flow (NYSE:DCF). Below are the calculations used to determine both the Fair Value (Intrinsic Value) Today and the Margin of Safety price depending on the investors discounted price requirements.

Thor Industries, Inc.

Future 10-Year Price Calculation:

This calculation uses the current EPS, expected EPS growth rate, and P/E Ratio to determine what the intrinsic value of the company will be in 10 years.

Thor Industries	Figures	Process
2017 EPS	7.09	Source: morningstar.com
Expected EPS Growth Rate	11.90%	Source: nasdaq.com
Future 10-year EPS	16.75	Calculate what the EPS will be in 10 years using the current EPS grown for 10 years at the compounded Expected EPS Growth Rate
Price/Earnings (P/E) Ratio	18.77	The P/E Ratio used to calculate the Future 10-year price is the lower of 2x the Expected EPS Growth Rate or highest yearly P/E over the past 10 years. Note: In this case, the 2x EPS growth rate is higher than the highest historical P/E (18.77) over the past 10 years, so I used the highest historical P/E. Source: morningstar.com
Future 10-year Price	$409.65	Future 10-Year EPS x P/E

Fair Price Today:

This calculation will use the Future 10-Year Price and discount that amount to today's price based on the investor's Required Rate of Return. Each investor has a certain minimum expected rate of return for taking the risk with a certain company. These prices would be considered the current intrinsic value of the company. As a value investor we would want to consider buying at this price or lower.

Thor Industries, Inc.
Required Rate of Return (NYSE:RRR)	Fair Price Today	Calculation
15% minimum required rate of return	$101.26	Future 10-Year Price / (1.15) compounded for 10 years
12% minimum required rate of return	$131.90	Future 10-Year Price / (1.12) compounded for 10 years
10% minimum required rate of return	$157.94	Future 10-Year Price / (1.10) compounded for 10 years

Margin of Safety Calculation:

In order to ensure a margin of safety, a value investor should look for a purchase price below today's fair price (intrinsic value). Some value investors call this the "on-sale" price. To find the price a value investor should look to buy this company is to identify their required rate of return and then identify the margin of safety they would need.

Example: For Investor A to invest in a company he/she requires a 12% return and wants to purchase a company at a margin of safety of 33%, then the price he/she should pay would be $88.37.

Margin of Safety	15% RRR	12% RRR	10% RRR
50% discount	$50.63	$65.95	$78.97
33% discount	$67.84	$88.37	$105.82
25% discount	$75.94	$98.92	$118.45

Winnebago Industries, Inc.

Future 10-Year Price Calculation:

This calculation uses the current EPS, expected EPS growth rate, and P/E Ratio to determine what the intrinsic value of the company will be in 10 years.

Winnebago Industries, Inc.	Figures	Process
Current EPS	2.67	Source: morningstar.com
Expected EPS Growth Rate	9.68%	Source: www.nasdaq.com
Future 10-year EPS	$6.72	Calculate what the EPS will be in 10 years using the current EPS grown for 10 years at the compounded Expected EPS Growth Rate.
Price/Earnings (P/E) Ratio	19.36	The P/E Ratio used to calculate the Future 10-year price is the lower of 2x the Expected EPS Growth Rate or highest yearly P/E over the past 10 years. Note: In this case, the 2x EPS growth rate (19.36) is lower than the highest historical P/E over the past 10 years. so I used the 2x EPS growth rate. Source: morningstar.com
Future 10-year Price	$130.22	Future 10-Year EPS x P/E

Fair Price Today:

This calculation will use the Future 10-Year Price and discount that amount to today's price based on the investor's Required Rate of Return. Each investor has a certain minimum expected rate of return for taking the risk with a certain company. These prices would be considered the current intrinsic value of the company. As a value investor we would want to consider buying at this price or lower.

Winnebago Industries, Inc.
Required Rate of Return (RRR)	Fair Price Today	Calculation
15% minimum required rate of return	$32.19	Future 10-Year Price / (1.15) compounded for 10 years
12% minimum required rate of return	$41.93	Future 10-Year Price / (1.12) compounded for 10 years
10% minimum required rate of return	$50.21	Future 10-Year Price / (1.10) compounded for 10 years

Margin of Safety Calculation:

In order to ensure a margin of safety, a value investor should look for a purchase price below today's fair price (intrinsic value). Some value investors call this the "on-sale" price. To find the price a value investor should look to buy this company is to identify their required rate of return and then identify the margin of safety they would need.

Example: For Investor B to invest in a company he/she requires a 10% return and wants to purchase a company at a margin of safety of 50%, then the price he/she should pay would be $25.10.

Margin of Safety	15% RRR	12% RRR	10% RRR
50% discount	$16.09	$20.96	$25.10
33% discount	$21.57	$28.09	$33.64
25% discount	$24.14	$31.45	$37.66

Final Determination

As of the writing of this article, Thor Industries (THO) has a price of $97.40, and Winnebago Industries (WGO) is priced at $37.00.

Both companies are valued fairly today based on their intrinsic values, with Thor slightly better priced than Winnebago. While these are fair prices, value investors should look for an additional margin of safety before purchasing. Looking at the Margin of Safety Calculations above, both companies are at or approaching a buy range depending on the level of discount desired and required rate of return.

Each investor has to determine their level of margin of safety and requirements in regards to required rates of returns, but both Thor and Winnebago should be on value investor's radar. They will both be placed on my Wishlist.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.