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Get Four
|  | JULY 13, 2004
 FOCUS STOCK By Efraim Levy, CFA A Smooth Ride with Winnebago S&P expects the RV maker's stock to outperform, thanks to a growing target market of people over 50 and a stronger economy We at Standard & Poor's Equity Research Services believe recreation-vehicle leader Winnebago Industries (WGO ; recent price, $34.96) is benefiting from favorable demographic trends, an improving U.S. economy, and its introduction of diesel-engine products. The stock carries S&P's highest investment recommendation of 5 STARS, or buy. Winnebago is a leading U.S. manufacturer of motor homes, self-contained recreation vehicles (RVs) used primarily in leisure travel and outdoor activities. We believe the outfit's main growth driver will continue to be a expanding target market: the over-50 population, which should keep increasing by more than 4 million annually until 2030. WIDER POOL. Furthermore, vehicle enhancements and increased demand for luxury products should help RV prices rise more than 2% per year. We expect Winnebago to post market-share gains because of what we regard as its reputation for quality and new product introductions. Also positive for Winnebago: A growing U.S. economy and a trend of increased RV use among younger consumers, who in the past usually didn't buy such vehicles. The pool of RV-buyer prospects has also broadened to include more affluent and better-educated customers. Hence, we expect Winnebago to achieve average annual revenue growth of 7% to 9% from fiscal 2005 (ending August). Winnebago believes its principal marketing advantages are its product quality, dealer organization, warranty and service capability, and marketing techniques. It makes or converts three types of motor homes: Class A, Class B, and Class C. Class A models are conventional motor homes built on medium-duty truck chassis, which include the engine and drive components. Winnebago also designs and produces the living area and driver's compartment. Class B models are panel-type trucks with added sleeping, kitchen, and toilet facilities. These models also have an extension for headroom. Class C models are mini motor homes built on van-type chassis on which Winnebago constructs a living area with access to the driver's compartment. NO LONG-TERM DEBT. In fiscal 2003, Class A and Class C motor homes accounted for 95% of sales, other RVs 2%, and other manufactured products 3%. RVs' primary use for leisure travel and outdoor recreation has historically led to a peak retail-selling season concentrated in the spring and summer months. S&P views Winnebago's balance sheet as solid. As of May 29, 2004, the business had no long-term debt. We see operating margins in fiscal 2004 and beyond aided by increased capacity utilization at Winnebago's newest manufacturing facility, a more favorable product mix, and greater overall operating efficiency due to higher volumes. However, we expect fiscal 2004 margins to be penalized by the costs of a product recall and higher stock-option expenses. Aided by an active share-buyback program (Winnebago's board authorized the repurchase of up to $30 million of common stock in mid-June), we expect earnings per share to advance 58% in fiscal 2004, to $2.04, from $1.29 in the prior year. In fiscal 2005, we project EPS to climb 18%, to $2.40. We see Standard & Poor's Core Earnings of $1.95 a share in fiscal 2004 and $2.31 in fiscal 2005, reflecting the impact of estimated option expenses. ATTRACTIVELY PRICED. We think Winnebago has high earnings quality. After a series of adjustments made to its GAAP-based net income from continuing operations and before extraordinary items to conform to S&P Core Earnings methodology, Winnebago's fiscal 2003 net income per share of $1.29 would be reduced by 4%, to $1.24. For fiscal 2004, we're projecting S&P Core EPS of $1.95, a 4% reduction from our operating EPS estimate of $2.04. We expect S&P Core EPS to be $2.31 for fiscal 2005, another 4% slice off our operating EPS estimate of $2.40. The decreases in fiscal 2004 and fiscal 2005 reflect estimated option expenses of 9 cents. S&P believes the stock is attractively valued at a recent level of 14.6 times our fiscal 2005 EPS estimate, at a p-e to estimated growth (PEG) ratio of 1.3 and at a 21% discount to our estimate of intrinsic value (determined by discounted cash-flow or DCF) of $44. Based on our DCF value and our target p-e of 19 for our estimated fiscal 2005 EPS, we arrive at a 12-month target price of $45, approximately 22% above recent levels. In light of this assessment, we believe the shares will significantly outperform the S&P 500-stock index. Potential risks to our investment recommendation and target price, in our view, include increases in gasoline prices, higher interest rates, and a reduction in consumer confidence that could lower demand for recreational vehicles.  Analyst Levy follows shares of automobile manufacturers for Standard & Poor's Equity Research Services All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report. Standard & Poor's Regulatory Disclosure Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc.
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