Monday, December 7, 2009

Short Idea: Winnebago (Ticker: WGO), That's not a Winnebago in my pants, but I am happy to see you

What they do:  They sell really expensive unneeded RVs.  Apparently people use them to go camping and drive cross country and shit.  Money McBags is not sure why people do either of those things since we have hotels and planes and thus camping and driving are so 1920s, but Money McBags also does not understand  this Lady Gaga thing so whatever.  The point is, RVs are expensive and we are in a little bit of an economic downturn (which you may have known had you been able to afford a computer to read this.).

Why Money McBags Thnks They Suck:

1. Their margins are truly gross:  Due to the fact that their production pretty much all takes place in their plant in Forest City, Iowa (where the men are men and the sheep are scared), they have huge fixed costs.  The fixed costs are so large that their gross margins are currently negative.  That's right, negative gross margins.  So it costs them more to make a Winnebago than it does to sell one.  It's like using an AIDS clinic as your dating pool.  Even when you score, you lose.  For the last year, their cost of production (and remember, this is before SG&A) was 114% of their selling price.  Now the market has bottomed for them and this should start getting better as dealer inventory picks up a bit, but even in their most recent Q it still cost them 3% more to make an RV than to sell one.  You don't need to be a maffematician to see the problem with this.

2.  Vertical integration ain't what it used to be:  As noted above, WGO's fixed costs are so ginormous, they are sunk before they even make a delivery, but the worst part is they can't do anything to fix it.  Since they have one plant that produces pretty much everything, they can't outsource parts of the process to cheaper plants in Mexico or Compton or wherever cheap labor is.  They are stuck with what they have and in order to be profitable with their given logistics, they would need to deliver about 1,800 RVs a quarter.  1,800 RVs, that sounds fairly easy, right?  I mean that's only about 35 RVs per state per quarter.  But guess what, in this last Q they only delivered 600 RVs total and they have only delivered 2,000ish on the entire year.  So they need to triple fucking deliveries just to break even.  To put that in more perspective, in 2008 Apple iPhone sales only grew 245% and the iPhones are fucking cool while expensive RVs are pointless and expensive.  Random shit that sucks just doesn't triple sales, no matter how much inventory has been cut.

They basically can't cut costs anymore and their other revenue (accessories, parts, etc.) went from $50MM to $30MM pushing up their prior 1,400 per Q break even number to the current 1,800.  Analysts are guessing that by 2011 sales will triple to make WGO profitable, but there is more chance that sales of Wilfred Brimley: A nude retrospective triple before WGO does.

3.  This two word phrase means you're fucked.  What is "secular decline?" (We also would have accepted "broken condom"):  Starting in 2004, annual growth in the RV industry was 4%, 1.5%, and then -9.5% in 2007.  So before the crash, RV sales were starting to fall and then in 2008 they were down 32% when all of the jobs and money dried up like Betty White's nether regions.  The point is, even before the glut of ABS. MBS, and just BS killed the global economy, RV sales were starting to decline.

4.  It's the economy, stupid:  First of all, these RVs are expensive.  On average they cost between $80k and $160k depending on how many toilets you want and how many shelves you need on which to place your NASCAR collectibles and boxes of Slim Jims.  Secondly, no one has any money.  Consumers are squeezed tighter than Joan Rivers' face.  With all of the mortgages in default, who exactly is going to have the money to buy an expansive completely discretionary item?  Which brings us to the final point which is that industry growth in the 2004-2007 time frame was driven by lenders giving money to anyone who was breathing and could fake an employment agreement.  You could put 10%, 5%, heck even 0% down.  Well that shit aint happening any more.  Only GE is still kind of lending in the RV space and those consumers who were over-leveraged are now under-duress.  It is easier for a straight man to get a hummer at an Indigo Girl's concert than it is to get an RV loan right now.

5.  Take my Winnebago, please:  Given the economic crisis, the used RV market has become more bloated than Kirsite Alley's small intenstine.  People are dumping their RVs below book values and well below current retail prices because they need money to pay their mortgage, loans, doctors' bills, and bangbrothers subscriptions.  Why would I buy a new Winnebago when I can buy one a year old one with no miles for less than half price?

6.  Stupid is as stupid does:  While WGO picked up some marketshare as competitors went into bankruptcy, Fleetwood and Monaco are apparently coming out of bankruptcy and those two will have more nimble production facilities.  Thor has remained profitable throughout as they have a better ability to control costs and this should allow them to outcompete WGO, especially on price.

7.  Valuation is out of whack:  WGO is not going to earn any money in 2010, they're just not.  Sales are not tripling, sorry guys, but there is zero chance of that happening if I round to the closest non-negative number.  Estimates for 2011 are somewhere around $.40-$.50 and falling by the hour.  Let's say they can earn $.50 in 2011 which is more of a guess by analysts than the box office draw was by the producers of Will Ferrell's Land of the Lost.  But ok, in 2 years WGO sales will more than triple and they will earn $.50.  Well they're trading at 22x that number.  The company has lost money for five consecutive quarters and sells a product that is too expensive for their target market, how does this deserve a premium multiple?  Oh yeah, it's going to grow 200%+.  Rigggggghhhhhhhhht.  If you believe that, I have a bridge and some Kevin Federline autographed AIDS tests to sell you.  Maybe they break even in 2011, maybe, and that is if you believe inventories at dealerships have fallen to almost zero right now so just getting back up to a former normal stocking level will drive revenue.  Anyway, let's say they actually have some positive earnings in 2011.  What multiple should a company in secular decline trade for when they have major operating cost issues?  8x earnings?  10x earnings?  If you believe that then they would need to earn $1.10 to $1.35 in 2011 and that's not going to happen.  In terms of EV/EBITDA, they had negative EBITDA (that is what negative gross margins do to you) and have an enterprise value of  about $290MM.  So if this kind of company should trade at 6ish times, then they will need to have about $50MM of EBITDA.  Well their EBITDA before the crash was $70MM, so do they get back to 80% of pre-crash EBITDA in 2011?  Doubtful.

Things to worry about:

1.  WGO is likely going to survive:  They do have brand equity and decent market share and management seems like they are making the best of a bad situation, so some long-term holders just may not be inclined to sell.  This company may make money eventually (though it could be 5 years out), so long time holders may be asking why bother selling now?

2.  They have $40MM net cash:   But this is mainly because inventories dropped by $60MM in 2009.  They have said that can't happen again (obviously, because inventories are down to $40MM so if they dropped by $60MM they would have negative inventory, but then again they have negative gross margins so nothing this company does really surprises me) and that inventories are starting to go up.  So is that $40MM cash cushion enough to keep them afloat as they still lose money and build back inventories?

3.  The consumer and job market comes back stronger than expectations:  It's possible.  But it's also possible that Faye Reagan is giving me a blumpkin as I write this (and trust me, if that were happening, I would not be writing this but I would be preparing to dial 911 as my heart would likely be about to explode at any minute in a surge of euphoric glee).

4.  It's cheap based on historical EV/EBITDA multiples:   Well so are my nuts and people aren't lining up to buy those (just kidding, my nuts remain premium priced with an adequate waiting line to purchase).  Before the crash, WGO had a peak EBITDA of $120MM which had fallen to $70MM by 2007.  So if you take that 2007 EBITDA and assume that by 2011 inventories will have risen, negative gross margins will have flipped, and leprechauns will roam the Earth giving away free pots of gold, thus getting WGO back to that level, then they are trading at around 4x that number.  Of course their net cash may start to decline as they are unlikely to burn through inventories and thus their EV is a bit depressed right now if demand does not pick up and fix their margins (though it's not as depressed as the guy who had Tiger Woods in the "least likely to get herpes" pool).


WGO is a company slated to lose money for at least one more year (and Money Mcbags thinks it will be longer), is producing RVs at negative gross margins, is a big ticket item in a 100% consumer discretionary spend space in the worst economy in 70 years, is in a market where much cheaper similar alternatives exist and with competition coming back in the market, and most importantly is fucking expensive.  Even if they were to earn $.50 in 2011 (which they won't), they should at most trade for 15x that and thus be valued at $7.50 (which is still too high).

If you can get borrow on this pig and agree with Money McBags' analysis, then go for it.

***Disclaimer:  Money Mcbags has no position in WGO, short or long.  He also has no position in the movie "White Men Can't Hump."

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