Stock pick Winnebago Industries. A value investor’s investment thesis.

Business Quality – Competitive advantages

• Niche market: Winnebago competes in the market of RVs and towable vehicles, which exhibits a moderate level of competition. There are basically only 2 major players in the US – Thor Industries and Winnebago, with market shares of around 70% and 20%, respectively.
• High barriers to entry: The capital-intensive nature of the product makes it difficult for new companies to enter the market. Building whole factories and production lines from scratch would require massive investment. Not to mention the fact that Thor and Winnebago dispose of massive brands in their lineup.
• Financial strength: Winnebago is managed very well and has astoundingly solid financials.
• Alignment of interest: Senior management owns sizeable stakes in the company ensuring long-term alignment between management and shareholders.

Overview of headline KPIs

A look at various headline KPIs helps get an idea from the start where to put the main emphasis when researching a stock. Ziggma’s intuitively organized tables with key figures and KPIs make our platform one of the best stock research tools in the marketplace.

We can see that the debt to equity ratio is at 0.5 on average and at 0.6 this year, which is right around the value Warren Buffett recommends as ideal (0.5). We can see that the interest coverage ratio is around 10 on average, which indicates the company generates ten times more cash flow before interest than it actually pays in interest.

The same holds for the current ratio, which is the ratio of current assets over current liabilities. The 5-year average of 203.8% indicates that the company has twice as much short-term assets as it has liabilities, indicating that we shall not have to worry about the company getting into liquidity issues and paying its creditors.

In conclusion, very moderate balance sheet leverage and a very solid liquidity position reflect a very solid financial position, as reflected by a financial position sub-score of 71. We can conclude that there are no financial or credit risks to be taken into consideration when valuing the company, i.e. we will not be adding any risk premium to our discount rate.

Profitability

In terms of profitability, we take a look at the 10 year average ROIC (return on invested capital), current year ROIC and WACC (weighted average cost of capital). ROIC is an important measure which tells us, how much the company generates from the capital it invests. WACC is a measure, which tells us, how much the company pays to shareholders and debtholders in order to get that capital. By simple economic intuition, if the returns on the capital are higher than the costs of the same capital, value is created, because company creates more from less. That indicates a competent management and likely a good investment.

We can see that the 10 year ROIC is at 20%, which is quite an astounding number, especially considering the WACC of 10%. Therefore, we can conclude that Winnebago creates a significant amount of value. Other profitability measures, as ROE or ROA are also strongly positive, which further suggest competent capital allocation by the management. It should be noted that the fact that current profitability levels are below long term averages is owed to the fact that 2020 was impacted by the global pandemic.

Let us now proceed to valuation by the DCF model.

Valuation

As always, the inputs are the most important piece when using the DCF, given its sensitivity to them. As we already made clear, we will be using a 10% discount rate, which has been derived from the WACC of the company. We are not adding any credit, liquidity or business risk premium.
The discount rate also represents our desired rate of return and appropriately discount the expected cash flows by this rate.
The growth rate for free-cash flows is set at 20%, as we discussed in the numbers overview chapter above. This is a very strong assumption and in order for it to hold, strong sales and capturing market share in the future will be necessary.
The last piece is the base year cash flow. First of all, in order to be conservative and mitigate cyclicality or abrupt increase/decrease in cash-flows from year to year, we are using the 4-year average, which is roughly $117 million.
Stock based compensation needs to be accounted for. By subtracting stock based compensation, we account for the dilution of shares and drag on cash-flow. The 4-year average for stock based compensation is $6 million, not a low but ok level. That gives us base year cash flow of $111 million.
Long-term growth rate is set to 3% to copy the growth of the economy and in order to be as conservative as possible. The final DCF valuation then look as follows:

The intrinsic value per share, adjusted for cash and debt is $136. Compared to last close price of $64.40 this yields a margin of safety of 53%. This represents a considerable level considering our rather conservative assumptions about the discount rate and base year cash-flow.
We have to remember one assumption though- the high growth rate of cash-flows. We assumed they would grow at least 20% a year, thus obtaining such a high intrinsic value. Should our assumption be incorrect, we must determine, what growth rate would be necessary in order for the margin of safety to be at least 30%, giving us a high enough margin for error.
In order for MOS to be 30%, the free cash-flow growth rate would have to be at 15.5%, ceteris paribus. Every investor considering Winnebago as an investment should ask themselves, whether this growth rate is realistic, in order to have a high enough margin of safety.

Summary

Winnebago is a financially strong company, which has had a great 2020/2021 so far. It posted growth in all business aspects, and most importantly in free cash-flow. Should this high paced growth continue, we deem the company as severely undervalued.
However, should this year be only aberrant and the company would grow only moderately, if at all, then the investment success would be doubtful. The growth of the company depends largely on demand for RVs, which requires further qualitative analysis, and thus discretion about this stock is necessary.