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  RV industry faces rough road

BENJ GALLANDER and BEN STADELMANN

Friday, November 14, 2008

The lure of the open road. Adventure around the next bend. The independence of a full tank of fuel and nobody telling you where to go. That ethos might sound like a born-to-be-wild biker, but it is also the tune of the more prosaic millions who satisfy their wanderlust by enjoying life on the road in a recreational vehicle.

The RV sector has also been a beneficiary of a demographic wrinkle — the vast numbers of baby boomers and empty nesters with the time and affluence to travel and see sights. And if the kids don't come home to visit, well, you can take your home with you and see them.

RV manufacturers rode out the mild 2002 recession in fine form. Gasoline was modestly priced and the havoc of 9/11 convinced many to avoid travelling abroad and instead see more of their own country. It also helped that financing was more akin to a home mortgage than a vehicle loan, with payments spread out over 20 years. And for Americans literally living on the road, interest is even tax-deductible.

Many of the larger players in the industry are well established and have a good history of profitability and paying dividends. Unlike so many other industries, U.S. manufacturers have not had to contend with foreign competition, which has helped plump margins.

Over the past decade, Winnebago built up its dividend from 10 cents (U.S.) a share annually to 48 cents. In 2004, the company earned profit of $70.6 million on revenue of $1.1 billion, with the stock cruising along in the $27-$39 range.

Another popular value stock was Monaco Coach, which targets well-heeled retirees with luxurious motor homes that tip the scales at up to a million dollars. At that price, lousy gas mileage is the least of your problems. It also did well in 2004, earning $37.5 million on sales of $1.4 billion, pushing the stock to the $30 mark.

The largest in the RV field is Fleetwood Enterprises, which sold $1.8 billion worth of RVs in 2004. That year, it also pulled in another $780 million from its manufactured homes division. The company has had trouble recapturing the glory days of the late 1990s, but the stock still managed to hit $16 in April 2004.

If you're reading this, then it's a safe bet that the market has been unkind to you this year. But the astonishing breadth of this downturn nonetheless masks the fact that some areas really have been hit harder than others. The implosion of the RV sector has been nothing short of hellacious.

Winnebago suspended its dividend last month, and the stock now trades for about $5. Monaco has been desperately trying to refinance its debt and is trading at $1.13. Fleetwood is on death's door, its common stock diluted to a thin gruel by a debenture conversion; it's now changing hands at 19 cents.

For the hardboiled contrarian picking over this road kill, the class of the field is probably Thor Industries. It has suffered as well, but a strong balance sheet with no debt and $189 million in cash provides room to manoeuvre and a degree of safety for its dividend. With its bus division, the company is also better diversified, and it is reasonable to expect that school buses and mass transit will be somewhat more resilient in the recession.

Will Thor be able to take advantage of failed competitors? If manufacturing capacity is substantially reduced, Thor might be able to grab the lion's share of a contracted market. But as we've seen with steel and airlines, competitors can emerge from Chapter 11 unencumbered by debt and with a lower cost structure. The road to making money in the RV business may be long and winding indeed.


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