Shipments of recreational vehicles dropped 20% during the first half of this year, but that hasn’t stopped stocks like Winnebago Industries, LCI Industries and Patrick Industries from rallying sharply in 2019.
To understand, you have to travel back in time a few years. The North American recreational-vehicle industry had seen several years of explosive sales growth since the last recession, to the point that dealers were left with empty lots and had to turn away customers. Industrywide shipments grew 15% annually on average from 2009 to 2017 as younger buyers joined the stereotypical retiree RV owners and adopted the outdoor lifestyle.
The industry expected another banner year in 2018, and fearful of again being caught without enough inventory, RV dealers stocked up in the fall of 2017 after model-year 2018 RVs were unveiled in September at the annual Elkhart Open House trade show. Manufacturers
(ticker: THO), whose brands include Airstream and Keystone, and
(WGO), plus components suppliers
(LCII) all have significant operations in the northern Indiana town. Roughly 60% of all RVs on the road today are manufactured in Elkhart.
Investors cheered the RV buying spree, bidding up shares of those four main players close to an almost 200% return from 2015 to 2017, versus 38% for the
during that time.
But the 2018 expectations turned out to be overly optimistic. A cold and protracted winter reduced foot traffic to dealers in the spring selling season, and their lots swelled with excess inventory. From more than 20% year-over-year shipment growth in the fall of 2017, industry wholesale volume turned negative in May and June of 2018 as retailers cut back on new orders.
RV stocks had been priced for another year of 20% shipment growth. When it became clear to the market that the streak had ended, shares plummeted. Thor stock lost 65% of its value, after dividends, in 2018. Patrick dropped 57%, Winnebago fell 56%, and LCI returned a negative 47%.
The backdrop has remained challenging this year. Leftover inventory from the 2018 model year meant that dealers had older product to move before ordering newer models. The weather hasn’t cooperated, either, with a particularly wet spring again reducing traffic to retailers. Shipments from manufacturers to dealers were down 20% in the first half of 2019 versus a year earlier. Meanwhile, rising wages and tariffs on imported components have hurt profit margins for manufacturers, and they have cut back on production.
But some investors and analysts may be calling a bottom on the RV slump and forecasting a return to shipment growth in 2020. Winnebago’s higher-end and new models have been a hit with customers, helping it gain market share and boost its stock 43% in 2019. Patrick and LCI have each returned about 33% this year, ahead of the S&P 500’s 16.7% return. Thor has been the one outlier, down 10%, as it integrates its largest-ever acquisition, Germany’s Erwin Hymer Group. Investors didn’t like the February deal, which significantly increased Thor’s debt and muddied its pure-play focus on the North American RV industry, with almost a quarter of sales now from Europe.
The 2019 Elkhart Open House is scheduled for the last week of September. In recent years, more than 10% of the industry’s annual sales have come at the show. How well the 2020 models perform will be the RV group’s next test.
Whether they pass or fail it could determine where the stocks head next.
Write to Nicholas Jasinski at firstname.lastname@example.org