Huge Upside Potential for Winnebago as They Just Bagged a Competitor

Summary

Over the last five years, WGO’s quarterly revenue has more than doubled

Compared to a 106.4% quarterly revenue growth, WGO’s EBITDA grew by more than 10-fold in the last five years

The news about acquiring Grand Design has pushed WGO’s YTD stock price by around 50.23%, but P/E is still at 17.75

BMO Capital Markets just set a new price target at $33, which still offers secondary investors an additional 15.26% upside potential

Company Overview

Iowa based Winnebago Industries Inc (NYSE:WGO) has been the most prominent manufacturer of recreational vehicles (RVs) in the world. Their recreation vehicles are mainly used for leisure travel and users who are looking for outdoor activities. They mainly manufacture motorhomes and towable recreation vehicles.

Besides designing, developing, manufacturing, and marketing recreation vehicles, Winnebago Industries Inc is also involved in producing original manufacturer parts (OEM), such as component products for other manufacturers and commercial vehicles.

One of the key strengths of Winnebago Industries Inc is their vertically integrated manufacturing facility, where they manufacturers all of its motorhome components. However, they market their finished products through independent dealers in the United States and overseas.

As of October 5, 2016, Winnebago Industries Inc had a market capitalization of $765.28 million and employed around 2,900 people to run its operations.

Review of Recent Financial Performance

01_revenue

Figure 1: Winnebago Industries Inc’s Quarterly Revenue Has Gone Up by 106.4%

Since the start of 2012, Winnebago Industries Inc’s quarterly revenue has more than doubled, an increase of 106.4% to be precise. Last quarter, on June 22, 2016, Winnebago Industries Inc posted its highest quarterly revenue in recent history, which came out at $272.08 million.

02_ebitda

Figure 2: Winnebago Industries Inc EBITDA Has Increased to $22.07 Million in Q2 2016

Compared to the 106.4% increase in revenue, Winnebago Industries Inc’s EBITDA has increased by more than 10 fold over the same time period, which came out to at $22.07 in Q2 2016 against less than $2 million in Q1 2012.

The impressive EBITDA growth compared to its revenue indicates that the management of Winnebago Industries Inc has been managed growth well and instead of solely relying on revenue growth, the internal operational efficiency has improved at a significant rate.

03_roe_ttm

Figure 3: Winnebago Industries Inc ROE ((TTM)) Has Been Gradually Stabilized Over the Last Few Years

Although the return on equity ((TTM)) of Winnebago Industries Inc has been fluctuating around 18% to 25% over the last three years, it has remained somewhat stable. Amid a more predictable revenue cycle and sharply increasing EBITDA, Winnebago Industries Inc started issuing regular quarterly dividends.

Over the last year, Winnebago Industries Inc has issued $0.40 dividend per share, which represents a 1.38% annual yield for investors.

04_price

Figure 4: Winnebago Industries Inc’s Stock Price Gone Up by 53.5% in the last One Year

However, investors were more than happy with the 1.38% yield, because the stock price of Winnebago Industries Inc has actually improved by 53.5% over the last 12-month period! In fact, after Winnebago Industries Inc announced the acquisition of privately held Grand Design for a cash-and-stock deal, valued at $500 million, this week, their stock price skyrocketed to $30.60 per share, representing a 50.23% year to date increase.

Acquisition of Grand Design is Can Create Significant Value for Investors

On August 29, 2015, Winnebago Industries Inc announced their year-end revenue, which came out at $977 million. But, with the acquisition of Grand Design, towable segment of Winnebago Industries Inc can grow to represent 37% of its revenue mix against the current contribution of around 10%.

Commenting on the acquisition of Grand Design, the CEO of Winnebago Industries Inc, Michael Happe, noted that it will help “Winnebago with greater overall scale and a more balanced portfolio across its motorized and towables segments.”

What it means that in a year or so, investors can expect Winnebago Industries Inc’s annual revenue to reach around $1.4 billion, says Reuters, representing a 43.30% increase.

05_pe

Figure 5: Winnebago Industries Inc P/E ((TTM)) is Still at a Reasonable Level

Even after the huge bullish move this week, Winnebago Industries Inc is trading with a P/E ((TTM)) of 17.75, and we believe the price has a huge potential to go much further up from here.

Conclusion

Although the integration of these two companies will take some time and the companioned revenue to reach the forecast of $1.4 billion would happen in the future, investors are optimistic that the initial bullishness of the stock price would likely to sustain.

In fact, we heard that just half an hour ago, BMO Capital Markets have upgraded the price target of Winnebago Industries Inc to $33.00 per share, which still represents a 15.26% upside potential for secondary investors based on the current market price of $28.63 per share.

We believe the integration of Grand Design into the vertically integrated manufacturing process of Winnebago Industries Inc would enable them to increase their market share in the long run and the initial price target set by BMO Capital Markets would appear to be a conservative estimate indeed.