Winnebago Industries, Inc. – Currently Listed as ‘WGO’ on the New York Stock Exchange

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Company Overview

Winnebago Industries, Inc. (“WGO”) is a manufacturer of recreation vehicles (“RV”s) and marine products. The Company distributes their RV and marine products primarily through independent dealers throughout the U.S. and Canada; and distributes their marine products internationally through independent dealers, who then retail the products to the end consumer. The Company has the following seven operating segments:

  • Grand Design towables
  • Winnebago towables
  • Winnebago motorhomes
  • Newmar motorhomes
  • Chris-Craft marine
  • Barletta marine
  • Winnebago specialty vehicles

Which then are incorporated into the following three reportable segments:

  • Towable: An aggregation of the Grand Design towables and the Winnebago towables operating segments.
  • Motorhome: An aggregation of the Winnebago motorhomes and Newmar motorhomes operating segments.
  • Marine: An aggregation of the Chris-Craft marine and Barletta marine operating segments.

There is also a Corporate/All Other category that includes the Winnebago specialty vehicles.

This Security Issue came to our attention at the price of approximately 56.01 at around early-April 2023, with drafting of this Piece beginning soon after. At the time it initially piqued our interest for several reasons, including:

  • The Company’s low P/E ratio
  • The Company’s low P/BV ratio
  • The Company’s ‘P/E * P/BV’ figure being less than 22.5
  • The Company’s current ratio
  • The Company’s previous earnings consistency and general increase
  • The Company’s cash dividend payments

Our Suspected Valuation at First Glance: Possibly ‘Gold’

 

Company Financials

All of the discussions below are based on the data presented in the Company’s SEC filings [3 -23].

Table 2 – 1 below shows the Company’s annual net income and diluted earnings per share, alongside their three-year averages:

Table 2 – 2 below shows data extracted from WGO’s most recently published SEC filing (10-Q) [3] regarding their balance sheet:

Using the information presented in the table above (Table 2 – 2) we have constructed a new table below (Table 2 – 3), consisting of the discernible tangibles which we here find more useful. We have included the values of these assets as stated on the balance sheet, alongside three liquidation values i.e., their ‘realizable value’ as presented in ‘Security Analysis’ (pg. 560) [1]:

Table 2 – 4 below shows how many of the Company’s relative assets and liabilities (as presented in Table 2 – 3) are attributable to each of the Company’s common shares:

 

Initial Discussions Regarding the Company’s Financials

The Issue’s current ratio is 2.42 in accordance with Table 2 – 3, and Table 2 – 4 above. The best, average and worst-case scenarios are 2.04, 1.87 and 1.63 respectively, all of which are above the minimum recommended figure of 1.5. The Issue also passes the acid test in all four instances.

The long-term debt value does not exceed 110% of the net current asset value in the stated case only, but does so in the latter three instances.

The Company has not demonstrated any losses over the last decade, and it is our opinion that the earnings have been fairly consistent. We believe the five- and 10-year averages can be taken as a reliable indication of the Issue’s previous earning power as opposed to the by-product(s) of a random assortment of numbers.

The Company has an uninterrupted annual dividends streak going back to 2014.

The Company’s most recent annual earnings were larger than those of six years prior; and looking at the three-year averages of our diluted EPS (beginning 2014) we can see that over the latest fiscal decade, the EPS have increase by approximately 518%.

The discernible tangible equity per share is 4.22 in accordance with Table 2 – 4 above; and we calculate the best, average, and worst-case scenarios to be -1.09, -4.12 and -6.58, respectively. The current price of 55.36 is greater than 120% of the only positive value, with the last three being negative and thus rendering the 120%-price-paid-to-DTE metric invalid in this instance.

 

The following points are for the more-involved investor(s)/shareholder(s); those who view common stock holdings as part-ownerships in an enterprise, irrespective of the short term public valuations, and not merely a tradable certificate “which can be sold in a matter of minutes” [2]. All of the points presented below have been factored into our valuation of this Security Issue here discussed.

Further Discussions Regarding the Company’s Financials

There were three main points we felt warranted further discussion or highlighting here as opposed to a single bullet point under the ‘Additional Observations Regarding the Company’s Filings’ subsection. Here we shall remind the reader that it is up to them and anyone else to whom it may concern, to come to their own conclusions after carefully considering the information they encounter during their own investigative works. We felt that the following three points were to be highlighted but of course some of you may naturally disagree and in your perhaps more, or even less informed opinion may have a different take on the information presented.

Acquisition Trend

The Company does seem to have a trend for acquiring smaller companies. Below is a list of the most recent from the latest decade:

  • “On November 8, 2016, we closed on the acquisition of all the issued and outstanding capital stock of towable RV manufacturer Grand Design RV, LLC (“Grand Design”) for an aggregate purchase price of $520.5 million. This acquisition was funded from our cash on hand, $353.0 million from asset-based revolving and term loan credit facilities, as well as stock consideration as is more fully described in Note 2, Business Combinations, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K” [13].
    • “Our acquisition of Grand Design, for example, provided important strategic positioning and earnings growth potential, but to partially finance the transaction we issued $124.1 million worth of common stock to the owners of Grand Design and registered these shares for resale after the transaction closed” [13].
  • “On June 4, 2018, we acquired 100% of the ownership interests of Chris-Craft USA, Inc. (“Chris-Craft”), a privately-owned company based in Sarasota, Florida. As a result of this acquisition, we manufacture and sell premium quality boats in the recreational powerboat industry through an established global network of independent authorized dealers” [13].
  • “On November 8, 2019, we completed the acquisition of Newmar Corporation, Dutch Real Estate Corp, New-Way Transport, and New-Serv (collectively “Newmar”) for total consideration of $357.0 million, which consisted of $264.4 million in cash, and 2.0 million shares of Winnebago common stock that were valued at $92.6 million ($46.29 per share discounted at 7.0% due to lack of marketability because of one year lock-up restrictions). The cash portion of the purchase price of the acquisition and certain transaction expenses were funded through the private placement of $300.0 million in aggregate principal amount of 1.50% convertible senior notes due 2025 (“Convertible Notes”)” [9].
  • “On August 31, 2021, we completed our acquisition of all the equity interests of Barletta for $286.3 million funded with cash payments of $240.1 million, $25.0 million in common stock issued to the sellers (subject to a 12% discount), and contingent consideration from earnout provisions” [5].

Positively these were related to the Company’s core operations but on the negative side of things: there were a lot of associated costs; there is much equity dilution as consideration for these often included the issuance of the Company’s Common shares; and large amounts of debt were accumulated on behalf of these. We also noted that in some instances a lot of the purchase price was on account of intangibles, a transgression very apparent in the Grand Design RV, LLC acquisition.

Admittedly the commentary on how the acquisitions has contributed to the fiscal results has been lacking in recent years, but if we look back to 2018 we can see that at the time, the acquisition’s contribution was significant:

Towable net revenues increased 666.3% in Fiscal 2017 as compared to Fiscal 2016. This was primarily due to the acquisition of Grand Design, which added revenues of $559.7 million in Fiscal 2017. In addition, Winnebago-branded towable revenues rose $36.1 million or 40.4% in Fiscal 2017.

Towable unit deliveries grew by 435.2% in Fiscal 2017 primarily due to the acquisition of Grand Design and also due to Towable segment growth in excess of recent industry trends. With the addition of Grand Design in November 2016, our towables market share increased from 1.1% to 5.1% when comparing shipments during the twelve month trailing periods ended August 2016 and August 2017. The addition of Grand Design has also resulted in a higher ASP due to a greater proportion of higher-priced fifth wheel units sold in Fiscal 2017 compared to Fiscal 2016. Strong increases in backlog and the dealer inventory turn ratio in Fiscal 2017 resulted primarily from the acquisition of Grand Design. [13]

All-in-all, using this and general logic, it does appear that there is some reliance on this mode of growth.

There is also the fact that when the Company last showed the operational results of Newmar’s operations for fiscal 2020 there was an operating loss, information that has not been divulged since.

Notes Investment Merit

WGO currently has outstanding two note tranches, $300.0 million of 6.25% senior secured notes due 2028, and $300.0 million of 1.5% unsecured convertible senior notes due 2025. Table 4 – 1 below shows our fixed charge coverage checks as per usual:

It appears that the coverage is sufficient and subsequently the notes are likely worthy of consideration of addition to a given portfolio. Consideration can be given to sinking funds and outside guarantees but those looking for confirmation of these should review the relevant prospectuses. We also have the following two points to make:

  • The interest rate on the secured notes is notably high, leading us to wonder why.
  • “The Senior Secured Notes and the related guarantees are secured by (i) a first-priority lien on substantially all of the Company’s and the subsidiary guarantor parties existing and future assets (other than certain collateral under the Company’s ABL facility) and (ii) a second-priority lien on the Company’s present and future accounts and receivables, inventory and other related assets and proceeds that secure the ABL facility on a first-priority basis” [9].

Depreciation Rates

The depreciation charges have not been delineated on the income statement but it has been said that they are charge to operations, so we believe they are included in the ‘total operating expenses’ which is formed of ‘selling, general, and administrative expenses’, and ‘amortization’ on the income statement. Our suspicion is exacerbated by the fact that the depreciation of lease assets is included in the costs of goods sold and SG&A (a matter made lucid in the 10-K Forms). Our issue in this instance is the fact that the depreciation is calculated using the straight-line method, according to the estimated useful life of the assets which has changed several times over the years. Table 4 – 2 below shows the estimated useful lives of the assets over the last decade or so:

Clearly these are not consistent, and the inconsistency of course leads to downstream inconsistencies in the net income values. Changing these values can lead to alterations in any valuation methodology used, and can inflate or deflate a multitude of values which is why we always comment on the depreciation rates and look for inefficiencies and inconsistencies. We’re not sure why these values have been altered so much for this Issue but it raises an eye-brow or two and is something we certainly believe should be queried with Management.

Additional Observations Regarding the Company’s Filings

Points we feel may be considered neither positive nor negative

  1. The Company profited during fiscal 2009 but not fiscal 2008 [26, 27].
  2. The Company may have recently completed a business cycle expansion.
  3. The Company is not overly conservatively capitalized so may make for a moderately interesting speculative purchase in this regard.
  4. We do not here suspect any corporate pyramiding.
  5. The Company’s basis of presentation states that the consolidated financial statements account for the Company and wholly owned subsidiaries, thus there is no need for fractional share ownership concerns.
  6. We did not note any recurring or non-recurring charges persisting for prolonged periods of time, although recently there were some restructuring charges.
  7. The Company has an active share repurchase plan under which they actively repurchase shares, and it appears the repurchased shares are kept on the balance sheet as treasury shares. We are not sure of the Company’s intentions with them.
  8. The Comprehensive income usually approximates to the net income.
  9. Up until the 2018 10-K Filing, inventories were valued according to the lower of cost or market, determined on the Last-in, First-out (“LIFO”) basis; then they were stated at the lower of cost or market, valued using the First-in, First-out basis (“FIFO”), except for our Motorhome segment which is valued using the LIFO basis; then from the 2021 annual report it was said that generally inventories are stated at the lower of cost or net realizable value determined under the FIFO basis, except for the Company’s Winnebago Motorhome operating segment which is determined using the LIFO basis.
  10. There are both “other current assets” and “other long-term assets” on the latest 10-Q Filing, the nature of which were not expounded upon so have not been factored into our valuations and calculations.
  11. The effective tax rates were previously consistently a few points below the official tax rate, but recently they have teetered above it; the Company also made use of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act.
  12. There were no large or concerning payments due in a year or so.
  13. The value of the assets (total and current) has not declined recently and caused any reason for concern.
  14. The Company is a ‘Large Accelerated Filer’ in Rule 12b-2 of the Exchange Act as of the 2017 10-K Filing, prior to which it was an ‘Accelerated Filer’.
  15. ‘Product Warranties’ has been a critical audit matter for the last four 10-K Filings, and ‘Business Combinations’ has been a critical audit matter for two out of the latest four 10-K Filings.

Points we feel may be considered negative

  1. The Company’s capital expenditures are not consistently within the range predicted in the previous year, thus predictions made by WGO do not present as the most reliable. The facility expansions were completed when predicted but there is not a long and consistently history of reliability in this sense.
  2. There has been a previous stock split [28] and there has previously been stock dilution on account of equity issuance when the Company issued $124.1 million worth of common stock to the owners of Grand Design.
  3. A rather large number of shares have been authorized allowing room for much possible equity dilution in the future.
  4. There is a high institutional ownership percentage of the common shares outstanding (64.85% [29] at the time of writing).
  5. The Company often says that they are involved in various legal proceeding but does not expound on the details. Positively they said “fiscal 2016 results of operations were impacted by $3.4 million in favorable legal settlements” [13], but overall the persistent dealings are still undesirable.
  6. We observed a few unfavourable Management developments:
    1. There are constant related party transactions as it pertains to one of the Executive Officers, Donald Clark.
    2. The Directors serve staggered three-year terms.
    3. The Company makes use of some non-GAAP measures to determine EO compensation although most metrics are GAAP reliant.
    4. The length of the DEF 14As has doubled in recent years.

Points we feel may be considered positive

  1. We would say the operations of the Company are relatively easy for the layman to understand.
  2. The Company was founded several decades ago, thus has stood the test of time.
  3. There is no customer or supplier risk concentration.
  4. We would say this is a relatively large company in terms of consolidated financials.
  5. Over the last decade there have been more year-over-year increases in cash and cash equivalents than there have been decreases over the last decade and five out of the six were not owed to the proceeds from loans.

Possible Questions for WGO’s Approximate 2,120 Stockholders to Consider, Investigate and/or Raise with Management

  1. Going forward can a brief history of the Company be provided in the 10-K Filings?
  2. Going forward can Management provide more commentary on why they believe there have been changes in the GAAP values?
  3. For a couple of years now, the Company has mentioned experiencing disruption in their supply chain due to the reduced availability of certain raw materials used in product manufacturing. For how long is this expected to continue?
  4. How have the acquired companies been performing since their consolidation? Have there been further operating losses, like there was of Newmar in fiscal 2020? Can this information be disclosed going forward?
  5. Why have the estimated useful lives of the Company’s assets been altered so many times over the last decade?
  6. The number of Shareholders of record has gone from 3,343 as of October 9, 2012, to 2,120 as of October 13, 2022. Why do Management think this has happened?
  7. Why have such a large number of shares been authorized? Can any reassurance be provided that these will not eventually dilute Shareholder equity in the near-term future?
  8. Going forward can a full compressive breakdown of all “other current assets” and “other long-term assets” be provided in all 10-K and 10-Q Filings?
  9. Why did the Company recently remove the table under ‘Contractual Obligations and Commercial Commitments’ header which outlined their upcoming payment obligations?
  10. Is there a nominal value of expected legal settlements at which the Company will disclose the nature of their legal proceedings?
  11. Why are the interest rates on the secured notes so high?
  12. Can WGO not pay more in cash dividends to Shareholders than they have been doing and if not, why not?
  13. Why The length of the DEF 14A Forms doubled in recent years and can their length be reduced?
  14. Why did the Company switch compensation consultants from Willis Towers Watson to Semler Brossy?
  15. The Board seems to have a history of having special meetings, what are these for?

 

Valuations

The price of this Security Issue at the time of this Piece’s publication is 55.36. Using our most recent three-year average of the diluted EPS (4.11) as opposed to the most recent EPS figure (6.59) increased the P/E ratio from 8.40 to 13.48; and using our discernible tangible equity value per share (4.22) as opposed to the stated book value per share (22.30, in accordance with Table 2 – 2) has increased the P/BV ratio from 2.48 to 13.11. With that in mind and considering current federal interest rates (5% at the time of writing), the current price does not appear to offer a sufficient margin of safety as per Benjamin Graham’s concept i.e., “over a ten-year period the typical excess of stock earning power over bond interest may aggregate 50% of the price paid” [2]. We should now also remind the reader of some of Graham’s other thoughts regarding the ‘margin of safety’ principle, viz.:

Diversification is an established tenet of conservative investment. By accepting it so universally, investors are really demonstrating their acceptance of the margin-of-safety principle, to which diversification is the companion…It is our argument that a sufficiently low price can turn a security of mediocre quality into a sound investment opportunity provided that the buyer is informed and experienced and that he practices adequate diversification. [2]

Taking our most recent three-year average value of 4.11 for diluted EPS and our stated discernible tangible equity value per share of 4.22, and multiplying the corresponding P/E and P/BV ratios of 13.48 and 13.11 respectively, we get a figure of 176.61, which is above Graham’s recommended upper-limit of 22.5 (which in this instance would corroborate with a share price of approximately 19.76).

Finally, we can make the following conclusions regarding the original points that initially piqued our interest in the Issue, considering our adjustments:

  • The Company’s low P/E ratio – still valid
  • The Company’s low P/BV ratio – no longer valid
  • The Company’s ‘P/E * P/BV’ figure being less than 22.5 – no longer valid
  • The Company’s current ratio – still valid
  • The Company’s previous earnings consistency and general increase – still valid
  • The Company’s cash dividend payments – still valid

Whether the current price is reflective of the Company’s future, present and past, in the reader’s opinion is for the reader to decide based upon their own research, however in our opinion this Security Issue appears currently overvalued on account of its current and previous quantitative showing.

Our Valuation: Rubber

This Company did not perform particularly badly in our ‘Initial Discussions Regarding the Company’s Financials’ section. That being said, the acquisition-disposition in conjunction with the negative elements we mentioned, as well as the constant changing of the fixed asset’s useful lifetimes are non-ideal matters leaving a sour taste. The current price is also rather excessive irrespective of everything else. For this to have reached the next highest valuation of ‘Plastic’ it would likely have had to come in at a pricing point of approximately 30-40.

At this point in time and all matters here considered, this is not stock pick we would likely follow nor likely add to a stock portfolio even at a seemingly reasonable price.

 

References

  1. Graham, B., Dodd, D.L., Security Analysis, (6th edition), (Warren, B.E., Klarman, S.A., Grant, J., Laderman, J.M., Lowenstein, R., Marks, H.S., Merkin, J.E., Berkowitz, B., Greenberg, G.H., Greenwald, B., Abrams, D), McGraw-Hill Education, 2008 – {ISBN 10: 0071592539/ISBN 13: 9780071592536 & ISBN-13: 978-0071592536/ISBN-10: 0071592539}
  2. Graham, B., The Intelligent Investor, (Revised Subsequent Edition), (Warren, B.E., Zweig, J), Harper Business, 2006 – {ISBN-10: 9780060555665 / ISBN-13: 978-0060555665}
  3. WGO’s 2nd 2023 quarterly fiscal report (10-Q) – https://www.sec.gov/Archives/edgar/data/107687/000010768723000006/wgo-20230225.htm
  4. WGO’s 2022 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/107687/000114036122038981/ny20004663x1_def14a.htm
  5. WGO’s 2022 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/107687/000010768722000024/wgo-20220827.htm
  6. WGO’s 2021 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/107687/000114036121036084/ny20000053x3_def14a.htm
  7. WGO’s 2021 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/107687/000010768721000043/wgo-20210828.htm
  8. WGO’s 2020 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/107687/000114036120024343/nc10014631x4_def14a.htm
  9. WGO’s 2020 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/107687/000010768720000035/wgo-20200829.htm
  10. WGO’s 2019 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/107687/000010768719000026/a2019proxy.htm
  11. WGO’s 2019 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/107687/000010768719000024/a201910-k.htm
  12. WGO’s 2018 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/107687/000010768718000029/wgo2018proxy.htm
  13. WGO’s 2018 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/107687/000010768718000026/a201810-k.htm
  14. WGO’s 2017 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/107687/000010768717000098/wgo2017proxy.htm
  15. WGO’s 2017 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/107687/000010768717000094/wgo201710-k.htm
  16. WGO’s 2016 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/107687/000010768716000129/a2016proxy.htm
  17. WGO’s 2016 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/107687/000010768716000126/wgo201610-k.htm
  18. WGO’s 2015 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/107687/000010768715000047/wgo2015proxy.htm
  19. WGO’s 2015 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/107687/000010768715000045/wgo201510-k.htm
  20. WGO’s 2014 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/107687/000010768714000049/wgo2014proxy.htm
  21. WGO’s 2014 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/107687/000010768714000048/wgo201410-k.htm
  22. WGO’s 2013 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/107687/000010768713000049/wgo2013proxy.htm
  23. WGO’s 2013 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/107687/000010768713000048/wgo201310-k.htm
  24. WGO’s 2012 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/107687/000010768712000042/a2012proxy.htm
  25. WGO’s 2012 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/107687/000010768712000041/wgo201210k.htm
  26. WGO’s 2011 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/107687/000010768711000049/wgo201110k.htm
  27. WGO’s 2010 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/107687/000010768710000020/wgo201082810k.htm
  28. https://www.stocksplithistory.com/?symbol=wgo
  29. https://www.gurufocus.com/stock/WGO/ownership

 

Throughout this Piece, any mention of a given year’s annual report refers to the 10-K Filing/Annual Report which represents the financial year ended that same year, typically in the calendar month of August, i.e., any mention of the ‘2019 10-K Filing’ or ‘2019 Annual Report’ etc. refers to the 10-K Filing representing the fiscal year ended August 2019. The Filings are usually published a few months later, that same calendar year.

Throughout this Piece, any mention of a given year’s Proxy Statement refers to the DEF 14A Form/Proxy Statement which accompanied the most recent 10-K Filing, i.e., any mention of the ‘2019 Proxy Statement’ refers to the DEF 14A Form which accompanied the 2019 10-K Filing; usually published not too soon after the 10-K Filing (typically the same calendar month(s) relative to the 10-K Filing’s filing date).

 

Disclaimers and Disclosures – https://wp.me/PcbS4Q-V