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When you're a high-flying stock with a recent history of besting both top- and bottom-line expectations, and when your shares are up nearly 85% year to date as of Wednesday's close, people expect a whole lot from you. Indeed, one misstep can bring on the sellers, and that's precisely what happened Thursday in recreational vehicle maker Winnebago Industries (NYSE: WGO).
Before the opening bell, Winnebago reported a fiscal Q1 profit that surged 51% over the same quarter a year ago. That's the good news. The bad news came on the revenue front. Year-over-year revenue growth of 15% to $222.7 million was below consensus forecasts for revenue of $233 million.
Although the company saw a 31% increase in motor home deliveries in the quarter to 2,005 units, it also saw a decline in deliveries of so-called "towables," which fell 13% to 484 units. Traders were indeed unkind to WGO shares after the mixed results, and the stock fell more than 13% in Thursday trade.
The disappointment on the top line for Winnebago comes on the heels of double-digit revenue growth for more than a year and a half. Those results also came with strong profit growth, hence the gains in the stock we've witnessed for the past two years, with WGO sporting a 300% total return over that period.
Now, because Winnebago is considered a bellwether for consumers' willingness to spend on big-ticket discretionary items, it's no surprise that today's drop in the stock has some pundits worried about the future of the industry, and of course, WGO shares. While I think that worry deserves consideration, I also think today's reaction in the stock is way overblown.
After all, the company did easily best profit expectations with EPS of $0.40 versus estimates for $0.37. The company also reported an increase in vehicle production of 27% in the first quarter from a year earlier, and 11% from the previous quarter. I suspect it's going to need that increased production to keep up with estimated future demand for its RV products.
According to Statistical Surveys, a research company that follows the RV industry, more Americans are taking to the road in recreational vehicles as sales of towable campers approach pre-recession levels and shipments of motorized models gain speed. Moreover, the Statistical Surveys reports that the total for all new units sold this year is projected to rise about 11% from last year to 316,300. As for next year, 2014 looks like "another good year," said Tom Walworth, president of the research company, who added that sales could top 335,000, the most in six years.This positive outlook for the industry was echoed by Richard Curtin, director of consumer surveys at the University of Michigan, who has analyzed the recreation industry for more than three decades. According to Curtin, the RV industry has gotten a boost from improvements in consumer spending, and the related wealth effect gains from a rebounding housing and equity market. Sales have "been steady and at a remarkably good pace, which is expected to continue for the next several years," said Curtin.
If the aforementioned industry watchers are correct, today's sell-off in WGO could represent a great trading opportunity for those who, like me, think that consumers will continue buying RVs in increasing numbers. If Winnebago can beat on the top and bottom lines when it reports again in March, then getting in at today's price level could be well rewarded.
Recommended Trade Setup:
-- Buy WGO at the market price-- Set initial stop-loss at $24.70, approximately 10% below the current price-- Set initial price target at $32.95 for a potential 20% gain in three months
As a die-hard value investor, I struggled with its valuation in the past, but now I'm ready to pull the trigger.
Following a breakdown, there are simply too many bearish technicals on its chart to ignore.
As bearish trends take hold, this pick has become an overpriced company in a struggling sector.