Winnebago Industries Inc. (WGO) September 21, 2015tippie.biz.uiowa.edu/henry/reports15/WGO_fa15.pdf · 2015. 11. 19. · Important disclosures appear on the last page of this report

Important disclosures appear on the last page of this report.

Is The Henry Fund

Henry B. Tippie School of Management

Liana Tamakloe [[email protected]]

Winnebago Industries Inc. (WGO) September 21, 2015

Consumer Discretionary – Recreational Products Stock Rating Hold

Investment Thesis Target Price $24.00 – $26.00 The Recreational Vehicle (RV) Industry has experienced impressive growth, recovering from the economic downturn, and the drastic decreases in discretionary spending. Much of the improvement has been on the wind of low crude oil prices and interest rates. With these being the main factors driving growth, slight volatility in these metrics will dampen growth. We do not foresee vast changes in these factors in the near future, and therefore recommend a hold. Drivers of Thesis

Low interest rates and low crude oil prices have become prevalent in recent times, and our forecast based on macro-economic conditions, geo-political events and global trends is that they will remain low in the next two years fueling growth in discretionary spending.

In the approaching 5 years, more baby boomers are expected to retire from active work. This population group are the prime target for RV sales and an increase in their number on retirement will increase demand for RVs as they take on recreational travels and other outdoor interests.

Winnebago has no debt on its balance sheet, and with the current environment of low interest rates, the company can take on some debt to enjoy the amplified earnings leverage creates.

Risks to Thesis

The RV industry is extremely sensitive to economic conditions. With these conditions beyond the control of the company, high stakes exist for investing in the company.

A formidable dealer network is prerequisite to success in the industry. Winnebago’s closest competition appears to be ahead of the company with a dealer network of 1950, compared to Winnebago’s 365 dealers in 2014.

Henry Fund DCF $24.42 Henry Fund DDM $13.59 Relative Multiple $25.42 Price Data Current Price $20.34 52wk Range $18.82-26.44 Consensus 1yr Target $26.20 Key Statistics Market Cap (M) $547.84 Shares Outstanding (M) 26.93 Institutional Ownership 82.80% Five Year Beta 1.54 Dividend Yield 1.80% Est. 5yr Growth 15.80% Price/Earnings (TTM) 12.87 Price/Earnings (FY1) 11.14 Price/Sales (TTM) 0.56 Price/Book (mrq) 2.66 Profitability Operating Margin 6.76% Profit Margin 4.77% Return on Assets (TTM) 13.50% Return on Equity (TTM) 24.79%

Earnings Estimates

Year 2013 2014 2015 2016E 2017E 2018E

EPS $1.14 $1.64 $1.53 $1.78 $2.01 $2.27

growth -26.0% 43.9% -6.7% 16.5% 12.9% 12.7%

12 Month Performance Company Description

Winnebago Industries Inc., headquartered in Forest City, Iowa manufactures recreational vehicles (RVs) for leisure travel and other outdoor activities. In addition to its RV manufacturing business, its incremental capacity is used in manufacturing other component parts for commercial vehicle and original equipment manufacturers. Among its products sold to its large network of dealers are motorhomes and towables of different sizes and features.

12.9

19.0

24.823.4

17.0

11.3

20.923.0

11.2

0

5

10

15

20

25

30

P/E ROE EV/EBITDA

WGO Industry Sector

-30%

-20%

-10%

0%

10%

S O N D J F M A M J J A S

WGO S&P 500

Source: Yahoo Finance

Source: FactSet

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EXECUTIVE SUMMARY

Winnebago is an industry leader in the manufacture of motorhomes, but has not gained much traction in the towables segment which contributes only 6% of net revenue compared to 90% contributed by motorhomes. The third segment of the company’s category of products contributes the remaining 4% to net revenues.

Sales in the RV industry has been increasing at impressive rates, mostly attributable to low crude oil prices and low interest rates, boosted by a steadily recovering US economy. As these factors improve, the cost of owning and using an RV drops, and so does the cost of acquiring one. Dealers also benefit from low interest rates to finance their purchases of the vehicles from manufacturers.

Another interesting industry trend is that as the number of baby boomers leaving the workforce on retirement increases, so does the number of young people who are now investing in acquiring RVs. The old notion of targeting retirees to purchase RVs seems to be fading away as manufacturers are targeting the younger working class as well. Whichever way it goes, both trends are good for industry players as it will lead to increased sales.

Disturbingly however, the main factors driving the increases in demand for RVs are beyond the control of the company. This makes us cautious however considering how volatile interest rates and crude oil prices can swing over short periods of time. Therefore, we recommend a hold action on Winnebago.

COMPANY DESCRIPTION

Winnebago Industries Inc. is a recreational vehicle manufacturer located in Forest City, Iowa. The business is organized into three main segments; Motorhomes, Towables and Other Manufactured Products. Of the

company’s total revenue reported in the most recent annual report, the Motorhomes segment contributed 90%, with the Towables and Other Manufactured Products segments contributing 6% and 4% respectively to revenue1.

Winnebago operates out of 3 cities in the United States, and sells its output to dealers mainly within the US and to some limited extent, in Canada as well. In the last 3 fiscal years, sales outside the US (including Canada) made up approximately 10% of total sales for each year. Revenues have been increasing in all three segments over the years since the Great Recession in 2008/2009. However, the fastest growth in revenue has been in the Motor Homes segment as can be seen from the graph below.

Motorhomes

Motorhomes are self-propelled mobile lodging used as temporary housing during vacations, camping trips, roadshows, political campaigns & tours etc. They are classified under 3 main segments; Class A, Class B and Class C, all of which are manufactured by Winnebago.

Class A motorhomes are fully-equipped mobile homes constructed on medium or large truck chassis. Winnebago manufactures both the living and the driver’s compartment in-house. An example of a Class A motorhome is shown below.

429 456496

719

853

0 1757 55 58

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2010 2011 2012 2013 2014

Revenue Trend by Business Segments

Motorhomes Towables Other Manufactured Products

90%

6% 4%

2014 Revenue by Segments

Motorhomes

Towables

Other ManufacturedProducts

Source: WGO 2014 10K


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Class-A Motorhome: Winnebago Elipse Ultra

Class B Motorhomes are built on minivans with a panel-type look. They come with sleeping, cooking and toilet facilities included. Some Class B motorhomes can be extended for more room overhead. An example of a Class B motorhome is indicated below. Winnebago’s line of Class B vehicles have earned the company the top spot among this class of motorhomes with a market share of 30.6%, according Statistical Surveys Inc.

Class-B Motorhome: Winnebago Travato

The last category of motorhomes, the Class C, is designed by building a living section onto a van-type chassis, with access to the driver’s compartment. This design is depicted in the image below.

Class-C Motorhome: Winnebago View

Generally, motorhomes come complete with sleeping, dining, bath and kitchen facilities to cater for a maximum of 7 people (depending on model size). In addition to these standard features, some additional accessories provided include generators, home theatre systems, king-sized beds, UltraLeather™ upholstery among others. Motorhomes are usually made to dealers’ orders and this allows for customization of some products.

At the end of fiscal year 2014, the company’s backlog of orders was estimated to be $172.6m1 in revenue. Our forecast for revenues for this segment projected average price growth of 1.41% reflecting the Henry Fund long term outlook on inflation and a unit sales growth of 5% per annum until the terminal year, where until sales are forecast to grow at 1.61% into the future, a reflection of market players’ estimate of long term revenue growth for the industry.

Towables

Towables are non-motorized recreational vehicles that are designed to be pulled along by pick-ups, SUVs, vans or other vehicles, and provides temporary accommodation for recreational travel. Towables are classified into 4 main categories; Conventional Travel Trailers, Fifth Wheels, Folding Campers Trailers and Truck Campers. Of these four, Winnebago manufactures Conventional Travel Trailers and Fifth Wheelers solely at its Middlebury, Indiana plant. Most of the component parts of its towables are appliances, frames and furniture, which are sourced from suppliers and assembled in this location. The Conventional Trailer and Fifth Wheeler vary by virtue of the hitch used to attach the trailer to the passenger vehicle. Whereas the Conventional Trailer uses a regular hitch, the Fifth Wheeler uses a raised forward section that allows for attaching with a special fifth wheel hitch. Both types of vehicles are shown below. Fifth Wheel: Winnebago Voyage

Source: WGO Corporate Website




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Trailer: Winnebago Minnie

Like the Motorhomes, our forecast revenues for the Towables segment was based on an increase in average price of towables by 1.41%, the long-term inflation projection by the Henry Fund and an increase in units sold by 5% per annum until 2020, where unit sales increase by 1.61% into the distant future.

Other Manufactured Products

The smallest segment of Winnebago’s operations, contributing approximately 4% to total revenue is the unit that manufactures a number of component parts and specialty vehicles for outside customers. Among these items produced are commercial motorhome vehicle shells for customization for use by law enforcement, mobile medical and dental clinics, commercial & hospitality transit, community and airport shuttles. For the transit buses, distribution is carried out nationwide by Metro WorldWide, the company’s distribution partner.

Trailer: Winnebago Metro Bus

This segment was forecast to grow at 10% percent for the first two years of the forecast period, then by 5% after until 2020 where growth was forecast to be 1.61% into the future.

Production and Distribution

Winnebago has 5 facilities in three locations in the country, 4 in Iowa and 1 in Indiana. The company has manufacturing plants in all of its locations in Iowa, Forest City, Charles City, Lake Mills, and Waverly (yet to begin operations). Additionally, it has its corporate offices, warehouses and service centers also located in Forest City. It manufactures all of its motorhome vehicles in these locations. Upon acquisition of Sunnybrook RV Inc., the towables manufacturing subsidiary of Sunnybrook Manufacturing in Indiana in Dec. 2010, the company began manufacturing towables at this location as that was the business line it inherited from the acquisition.

The company sells its output on wholesale to dealers who subsequently sell to the retail market. In 2014, the total number of dealers for the motorhome and towables segments were 274 and 207 respectively operating within the US and Canada. 113 of this number carried both kinds of RVs. In 2013, these numbers stood at 245 and 272 respectively for total motorhome and towables dealerships.

In 2014, total units delivered to dealers increased by 28.4% for motorhomes, whereas average sales price (ASP) decreased by 7.8%, and yet leading to an increase in revenue by 18.8% for the segment. This turn of events is partly due to the new products introduced by the company in fiscal year 2014 which happened to be priced at lower points. For the towables segment, unit shipments decreased by 1.0% while ASP increased by 8.6%. This led to an increase in revenue by 6.3%.

In the last few years, the ASP for the company’s products have been fluctuating between increases and decreases. For forecasting purposes, we projected a yearly average

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2014 Dealership Distribution

Motorhome Both Towables




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price increase of 1.41% (Henry Fund long-term inflation forecast) to smoothen out the variations in price going forward. In similar fashion, there have been some fluctuations in the number units sold, with the outcomes leaning more for increases than decreases. We have kept increases in unit deliveries at 5% over the forecast period until the terminal year where sales slowdown to 1.61% growth. This stance reflects our view on the macroeconomic and demographic factors such as improved employment conditions, increasing retires as baby boomers grow old, and low oil prices.

Suppliers and Other Business Relationships

Winnebago employs a number of raw materials such as steel, aluminum, wood and fiberglass from several sources. The company in its 2014 10-K does not provide any information on hedging activities it may be engaged in to minimize risks from potential volatility of commodity prices. In the meantime however, and possibly forecasting into the next couple of years, the low commodity price environment being experienced now may persist and will therefore not pose much of a threat to the business of the company.

Other suppliers the firm deals with are chassis manufacturers. Among those suppliers from whom chasses are procured include Ford Motor Company, Mercedes Benz (USA & Canada, a Daimler Company), Chrysler Group LLC, and Freightliner Custom Chassis Corp. (Daimler Company). The company maintains standard supplier relationships with these suppliers just as it does with suppliers of other raw materials. Both Ford and Freightliner account for more than 10% of chassis supply individually and together constitute about 32% of supply.

Winnebago, in addition to selling manufactured RVs, provides after sales parts and services to retail clients at its Forest City location in Iowa. The company also competes strategically by making proprietary parts available to retail clients through its dealer network. This is expected to strengthen the value of the brand to the client and therefore lead to strengthened relationship with the company’s products.

RECENT DEVELOPMENTS

Third Quarter Results

Winnebago has been performing well in recent years showing good signs of recovery from the Great Recession. In June this year, it released its 3rd quarter earnings results which came in ahead of analysts’ estimates on both revenue and net earnings.

Total revenue for the 3rd quarter came in at $266.5m, representing a 7.6% increase over that for 2014, and beating estimates by $5.07m. On the net income side, the company earned $11.5m ($0.43/share) compared to $11.4m ($0.42/share) for the same period last year, and beating estimates by $0.02 on a per share basis.

On a quarterly basis however, gross margins were slightly lower than in 2014, 10.6% as against 10.8%; and on the 9-months ending May 30, it remained relatively unchanged at 10.6% for 2015 and 10.8% for 2014. Operating margins were 6% and 6.3% for 2015 and 2014 respectively for the quarter, and 5.9% and 6.5% respectively for the 9-months ending May 30. The lower margins in 2015 were explained to be the result of expenses incurred related to two strategic initiatives the company was undertaking; and Enterprise Resource Planning (ERP) implementation and a Strategic Sourcing project both of which are to improve efficiencies once completed and lead to cost savings for the company. Additionally, an impairment charge of $0.5m was taken in relation to the corporate aircraft which is being held for sale2.

The company is due to release its 4Q and year-end earnings for 2015. Our model however predicts a 1.98% decrease in total revenue which is based on reduced ASPs for the motorized units due the lower price introductions of new models released in fiscal 2015. As the years progress however, we expect ASPs to normalize and increase going into the future. Our forecast for operating margins improves as we progress over the forecast period from 7.12% in 2015 to 13.12% in 2020, based on our assessment that completion of the Strategic Sourcing project at the end of fiscal 2015, will begin to yield significant cost savings for the company, and complete implementation of the ERP system will also offer cost savings. Finally, improving general economic conditions should reflect in some modest increases in dealer demands for RVs.

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Other Miscellaneous Events

In the most recent two earnings calls for the company, management commented on two strategic initiatives being undertaken to improve overall efficiency in operations and lead to cost savings in the future. The first project involves the engagement of a global business consulting firm to review the company’s procurement and raw material sourcing activities and advice on improvements to the process to achieve efficiency and long-term cost savings. This is estimated to increase general and administrative expenses by about $2.6m over the 2015 calendar year, and is expected to be completed and generate gross margin expansions of 30 – 50 basis points. The second project is an implementation of an ERP system that is to streamline supply chain activities for increased optimization and achieve operational efficiencies for the company. This new system to be implemented will replace the in-house-developed legacy system the company currently uses, to bring its systems to be at par with current industry standards. Microsoft Dynamics is the partner of choice for this project thus far, and the entire implementation is estimated to cost $12 - $15 million over the next 3 years.

In May this year, Winnebago acquired a 33,000ft2 property in Waverly, Iowa for the manufacture of wire loom assemblies for its motorhomes. This property is being modified to meet the company’s needs and hiring employees for the location is expected to be done in the 2nd quarter of 2015. Payoffs from this investment is expected to be realized in the first fiscal quarter of 2016.

In fiscal Q2, the company announced completion of an upgrade to an electro-deposit paint system which provides the company a competitive quality advantage as its RVs will be able to withstand corrosion more and therefore last longer. The company assesses that this system is unique and makes it the only company within the industry with this capability. In addition to preventing corrosion, additional benefits of the enhanced system include increased capacity and improved efficiency, which leads to lower operating costs. Also, the new system produces less waste, requires fewer personnel to operate and turns out a better quality e-coat process.

In 2014, Winnebago entered into a sale and buy-back arrangement with Apollo Motorhome Holidays, the largest privately-held motorhome rental company globally. Under this arrangement, 520 motorhomes were sold to the

company, with up to 343 of those to be repurchased by Winnebago after one rental season expires provided certain conditions are met. This agreement represented a substantial order for Winnebago, and the repurchase agreement was to secure the order. The motorhomes subject to repurchase were recognized as investments in operating lease assets in the books of the company, at $16m and an operating lease repurchase obligation of $16.1m was recorded in the liabilities section to recognize the potential liability. This arrangement was for a period of one year, and due to the success of the program, was renewed for the 2015 fiscal year. For 2015 however, slight changes to the terms was the withdrawal of the repurchase obligation, and a total of 500 units is to be delivered3.

INDUSTRY TRENDS

Target Market and Age Dynamics

For a long time, the target market for RV manufacturers have been the people of the older age bracket of 45 – 54 years and older. This market group has been an ideal target because of accrued savings to be able to make the heavy investments required to own an RV. Additionally, some attained retirement and as outdoor enthusiasts, enjoy going on road trips to occupy their time. However, reports by the Recreational Vehicle Industry Association shows that the average age of RV owners is gradually declining. According to a CNBC article on this shift in dynamics, the fastest age group of RV owners is 35 – 44 years old. These people tend to have a more active lifestyle and like to spend more money on experiences as compared physical goods, all of which fit nicely into the benefit offerings of RVs3.

Now this trend is a huge plus for the industry in two ways. Firstly the regular age target market of retirees etc, is expected to expand in the future. More baby boomers will be reaching retirement in the coming years and so present a huge market potential for the industry. Secondly, the trend towards younger people owning and engaging in the RV lifestyle means increased revenue for manufacturers, especially in these current times when the labor market has shown significant recovery from the recessionary conditions of 2008-2009 and general economic activity is showing steady improvements.

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Low Gas Prices and Interest Rates

A little over a year ago, crude oil prices have decreased considerably and have been trading below $50/barrel for more than a month now. One of the biggest cost components for an RV road trip is gas, and so gas prices will go a long way in influencing consumers’ decisions on either purchasing an RV or renting one for a road trip. Interestingly, reduced ownership/servicing cost is not the only advantage players in the RV industry stand to gain from lower gas prices. As highlighted by Randy Pots in an interview with CNBC in May, lower fuel prices translate into lower raw materials costs such as will be incurred in transporting motorhome chassis components from suppliers to RV manufacturers4. In general then, both inbound and outbound freight and transport costs will decrease as a result of cheaper gas expenditures.

Interest rates in the United States have declined considerably since the recession and have stayed near zero for close to a decade since the onset of the Great Recession in 2008/2009. Like lower gas prices, low interest rates have a meaninful effect on several aspects of the RV manufacturing industry. Firstly, organisations will have access to capital at cheaper costs than would have been the case 10years ago. Secondly, since all RVs are sold to the retail market through dealers who require some form of pre-finance, a low interest rate environment will give them access to funds to build up inventory, leading to improved demand and backlog for RV manufacturers. Finally, many of these consumer durable investments are made by means of credit. People are more willing to borrow money for such purchases when they expect favourable interest rate quotes on their loans.

MARKETS AND COMPETITION

The RV Industry is at a mature stage with fairly low concentration of companies which dominate the landscape.

Many RV manufacturers are located within the State of Indiana in the US. This happens to be close to the Great Lakes region and the cities of Detroit and Chicago, with a little over 10% of industry players concentrated within the region5. Some cargo trailer manufacturers also

manufacture trailer RVs and since this location provides the means for transport of goods to and from those two cities, it is not surprising that RV manufacturers also are concentrated there.

Unlike passenger vehicles which are sold by the millions annually, some hundred thousands of RVs are sold per annum. This low volume nature of the market also makes customization very possible resulting in a labor intensive process. Among other factors, a successful RV manufacturer therefore should be able to scale up labor during peak periods, and cut back on labor when demand is low.

As noted earlier from the discussion of Winnebago’s operations, sales of manufactured products are made through dealers. An extensive dealership network therefore guarantees reaching a great customer base with your products. In addition, exclusive sales arrangements such as that between Winnebago and Apollo will generate continued business and ensure a healthy backlog of demand for business success.

In a low concentration RV market, competition among industry players is medium. Many manufacturers compete on price and product features such as satellite internet, TV installations, luxury kitchen appliances and large floor space among others. Especially in the towables market where volumes are higher and margins lower, the level of price competition is much higher.

An added reason for low competition within this market is the capital intensive nature of the business. A new entrant will require substantial capital to acquire new facilities to make RVs, especially when the equipment required are somewhat specialized to be to achieve customization of products. Also, a good dealer network provides the opportunity to reach the retail customer and long-standing relationships exist between current market participants and dealers. Breaking into the market to establish the required level of trust is prohibitive to new entrants.

Peer Comparisons

Among companies listed in the table below, the one true comparable to Winnebago is Thor Industries. All these other listed companies manufacture non-conventional vehicle or recreational products and is therefore comparable to a limited extent based on the discretionary

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nature of their output, and the set of factors facing companies in that sector.

Thor Industries like Winnebago, manufactures both motorhome and towable RVs and markets to dealers in the US and Canada. The company’s product mix is composed of 77% towables and 23% motorhomes, compared to Winnebago’s 6% towables and 90% motorhomes. Thus they maintain industry leadership in the towable segment and a significant competition to Winnebago’s efforts to gain traction in that market.

Although a fairly younger company than Winnebago, Thor has grown faster in terms of market share and capitalization. The company’s growth strategy has been mainly through acquisitions, whereas Winnebago has grown more organically. Following acquisitions of other distressed RV manufacturers, Thor runs a decentralized operating structure with each entity continuing operations as an independent operating entity. The company believes this engenders an entrepreneurial spirit and allows sufficient modification to meet clients’ needs.

Peer Comparisons

Company Mkt Cap

($) Net

Sales ($) P/E(ttm)

EPS ($)

Net Profit

Margin (%)

ROE (%)

Harley-Davidson Inc. (HOG)

11.17B 6.00B 14.59 3.73 13.24 24.86

Thor Industries (THO)

2.83B 3.99B 14.66 3.69 4.94 20.08

Patrick Industries (PATK)

718.67M 834.58M 20.43 2.28 4.29 32.78

Winnebago Industries (WGO)

547.84M 971.39M 12.94 1.57 4.37 21.47

Johnson Outdoors (JOUT)

231.51M 429.72 26.17 0.89 2.02 4.26

Spartan Motors (SPAR)

136.34M 536.21M 99.5 0.04 0.25 0.73

With a profit margin of 4.94%, Thor compares favorably with Winnebago.

WGO & THO Price Performance, Year-To-Date

ECONOMIC OUTLOOK

As a company in the Consumer Discretionary Sector, occurrences in the wider economic sphere often have a direct impact on the immediate future prospects of the company. Among the most prominent drivers are:

Crude Oil Prices

As noted earlier, the price of crude oil has been declining in the last 15 months when it was at a peak level of above $100/barrel. Compared to its current trading price of about $44/barrel, savings consumers can realize on gas expenses is large, approximately 56% savings.

Since the use of an RV requires gas, the current environment of low gas prices will be to the benefit of RV owners. This should translate to more purchases and rentals of RVs by the retail market.

Source: Factset, September 2015

Source: Nasdaq, September 2015

Source: Yahoo finance, September 2015

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As a fund, our view on the current crude oil situation is that the low prices will persist as there are no signs of reduced oil production, or increases in demand to absorb the glut. With our forecast of average long-term crude oil prices of $61/barrel into the next couple of years, the RV manufacturing industry is set to gain generously.

GDP & Unemployment

The US economy has seen impressive recovery from the effect of the 2008/2009 recession. GDP has been growing at a steady pace, with some industries such as auto manufacturing showing signs of increased demand. With improved demand, business decision makers will employ more people to meet production needs.

US Unemployment Rate

As this cycle continues, more income will flow to consumers and as prosperity increases, people will invest in discretionary activities as they now have more disposable income and the job markets are stable. Data on GDP numbers and unemployment shows a persistent decline in unemployment and a steady growth in GDP.

US GDP Growth

In the long run, the Henry Fund predicts unemployment to stabilize at 5.3%, a slight increase from the current rate of 5.1% and long-term GDP to growth at an average 2.9% in the next couple of years. If these forecasts should hold true, discretionary spending by consumers is sure to keep growing or worst case, remain unchanged, which will be in the favor of companies like Winnebago.

Interest Rates

Following the economic crises of 2008, the Federal Reserve Bank has maintained its benchmark interest rates near zero for about 7 years now. This indicative rate feeds into the economy and informs credit terms for issue of corporate credit, granting of personal loans and all other financial products with an interest rate component embedded. The low interest rate regime currently being experienced has three main implications for a company like Winnebago: retail consumers can access cheaper credit to buy RVs, Dealers will have access to cheaper financing to purchase wholesale from manufacturers and Winnebago can access credit in the funds market at a cheaper cost. As the company currently has no debt on its books, raising some bonds at such low rates will prove beneficial.

Federal Funds Rate

In the long run, the Henry Fund predicts the Federal Funds rate to rise to 0.75% over the next two years from its current low point of 0.25%.

CATALYSTS FOR GROWTH

One of point of competitive advantage is continued innovation in product design and features. If Winnebago is able to produce RVs with ingenious features, it will ensure it maintains its position as the top Motorhome

Source: US Dept. of Commerce, 2015

Source: US Dept. of Labor, 2015

Source: Federal Reserve Bank of St. Loius

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manufacturer in the US from which segment 90% of its revenue is generated.

As has been discussed, a solid dealership network provides the means to reach the retail market and maintain market share. From fiscal 2013 to 2014, the company’s dealership network for its towables reduced by 65 dealers, a huge drop in dealership over a period of only one year. The company will have to come up with ways to keep its dealers engaged and motivated to carry its products.

The vast increase in the number of units delivered in 2014 was partly as due to favorable economic conditions currently being experienced. Interest rates and crude oil prices make it less costly to engage in recreational travel at this point in time. However, these two economic indicators have been among the most talked about in terms of sustenance. Obviously, the market is expecting some movements in the values of these metrics. If this environment of low fuel prices and interest rates come to an abrupt end, the good fortunes currently being enjoyed by the company will be short-lived.

INVESTMENT POSITIVES

Low interest rate environment makes it attractive to get credit for purchase of durable goods and our long-term look on interest rates does not show any significant increases.

The current low crude oil prices were not predictable about a year ago, and has persistently remained low. With decreasing energy demand in global markets and no signs of a cutback in production, crude oil prices will remain low and should fuel consumers’ demand for discretionary goods including RVs.

Winnebago carries no debt on its balance sheet. This gives the company room to introduce some leverage and reap the benefits of the scaling effect. Additionally, the current low interest rates environment makes debt issues attractive.

The increase in the number of baby boomers approaching retirement is good news to RV manufacturers as they are the original target market for RVs and interest from that segment of the population for an active outdoor life has not waned.

INVESTMENT NEGATIVES

As Winnebago sells mainly to consumers through a dealer, it is important to expand its access to dealers.

Compared to Thor industries with almost 2000 dealers to market its products, Winnebago may be pushed out by the competition if it does not implement strategies to expand its dealership relationships.

The main economic drivers that make Winnebago an attractive stock are very volatile and beyond the control of the company.

VALUATION

Revenue Forecasts Our forecasts of revenues considered the price pressure Winnebago has been experiencing in the motorhomes market and thus started with a unit price reduction of 6.65% but growing steadily at the rate of 1.41% representing our long-term view on inflation. Similarly, unit prices for the towables segment started an increase of 16.16% replicating increases in ASPs for this segment and then continuing to grow at 1.41% thereafter over the forecast period. Unit sales growth for both segments was forecast at 5% annually and then 1.61% in the terminal year, in line with long-term growth estimates for the industry. This led to a CAGR of 4.78% in revenue over the forecast horizon.

Expenses and Margins Cost of Sales was forecast based on the most recent ratio of COGS to sales. We kept this ratio constant over the entire horizon to smoothen out increases and decreases in COGS that will be experienced in reality. Both Selling, General & Administrative expenses were forecast based on an average ratio of SG&A to net sales over the last 5 years. We do not foresee any sharp deviations in the make-up of SG&A costs and therefore kept the ratio constant. These translate into improved operating margins of 7.12% at the start of the forecast to 13.12% at the terminal point of the period. Likewise, net margins improve from 4.91% to 9.05% over the forecast period.

Valuations With a beta of 2.22, a CV growth rate of 3.03%, and a WACC of 13.7%, our DCF model brings us to a price of $24.42, our DDM, $13.59 and our relative valuation of $25.42. Since the company recently started paying dividends since 2009, we shall place minimal value on the

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outcome of the DDM model. We feel the DCF value has several moving parts and incorporates a host of assumptions which are bound to vary widely within a short period. We will therefore go with a price target ±$2.00 of our relative valuation metric. As markets have experienced some correction lately, and several of the companies used in constructing the value bear close similarities with WGO in terms of broad market dynamics, we will go with a price range of $26.00 - $30.00.

KEYS TO MONITOR

The main drivers of growth for Winnebago are the three main economic metrics of Crude Oil Prices, Unemployment and Interest rates. A significant change in any of these factors can extensively impact consumers’ sentiments about general economic conditions, access to credit and general standard of living. Should this happen, our outlook on Winnebago as a stock to hold may vary depending on the direction of change.

REFERENCES

1. Winnebago Industries Inc. 2014 10-K.

2. Winnebago Earnings Release for 3Q, 2015.

3. CNBC – The RV Industry, thriving, getting younger: http://www.cnbc.com/2015/03/28/stry-thriving-is-getting-younger.html

4. CNBC – What’s driving RV sales: http://seekingalpha.com/symbol/WGO/videos/3476366

5. IBIS World Industry Report – Truck, Trailer and

Motorhome Manufacturing in the US, July 2015.

6. Seeking Alpha – Company discussions on Q1, Q2 and Q3 earnings

IMPORTANT DISCLAIMER

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http://www.cnbc.com/2015/03/28/stry-thriving-is-getting-younger.html

http://www.cnbc.com/2015/03/28/stry-thriving-is-getting-younger.html

http://seekingalpha.com/symbol/WGO/videos/3476366

http://seekingalpha.com/symbol/WGO/videos/3476366

Page 12

Winnebago Industries Inc.

Key Assumptions of Valuation Model

Ticker Symbol WGO

Current Share Price $21.68

Current Model Date 11/2/2015

Fiscal Year End Aug. 30

Pre-Tax Cost of Debt 3.21%

Beta 2.22

Risk-Free Rate - 30 yr Treasury Yield 2.95%

Equity Risk Premium 4.85%

CV Growth 3.03%

Current Dividend Yield 1.91%

Marginal Tax Rate 25.12%

Long run Inflation rate 1.41%

Long run unit sales growth 1.60%

WACC 12.50%

Cost of Equity 13.73%

Shares Outstanding ('000) 26980


Revenue Decomposition

Fiscal Years Ending Aug. 30 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

REVENUE

Motorhomes 496,193 718,580 853,488 872,915 918,680 978,215 1,041,609 1,109,110 1,142,744

8.73% 44.82% 18.77% 2.28% 5.24% 6.48% 6.48% 6.48% 3.03%

Towables 56,784 54,683 58,123 72,122 76,796 81,773 87,072 92,715 95,526

239.78% -3.70% 6.29% 23.33% 6.48% 6.48% 6.48% 6.48% 3.03%

Other Manufactured Products 28,702 29,902 33,552 31,906 35,097 36,851 38,694 40,629 41,279

22.82% 4.18% 12.21% -4.91% 10.00% 5.00% 5.00% 5.00% 1.60%

Total Revenue 581,679 803,165 945,163 976,505 1,030,573 1,096,839 1,167,375 1,242,453 1,279,550 17.18% 38.08% 17.68% 3.32% 5.54% 6.43% 6.43% 6.43% 2.99%

UNIT SALES

Motorhomes 4,642 6,821 8,755 9,097 9,552 10,029 10,531 11,057 11,234

5.62% 46.94% 28.35% 3.91% 5.00% 5.00% 5.00% 5.00% 1.60%

Towables 2,338 2,535 2,509 2,670 2,804 2,944 3,091 3,245 3,297

204.03% 8.43% -1.03% 6.42% 5.00% 5.00% 5.00% 5.00% 1.60%

AVERAGE PRICE

Motorhomes 106,892 105,348 97,486 94,841 96,178 97,534 98,910 100,304 101,719

2.95% -1.44% -7.46% -2.71% 1.41% 1.41% 1.41% 1.41% 1.41%

Towables 24,287 21,571 23,166 27,012 27,393 27,779 28,171 28,568 28,971

11.76% -11.18% 7.39% 16.60% 1.41% 1.41% 1.41% 1.41% 1.41%


Income Statement

Fiscal Years Ending Aug. 30 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Net revenues 581,679 803,165 945,163 976,505 1,030,573 1,096,839 1,167,375 1,242,453 1,279,550

Cost of goods sold 533,127 713,770 837,169 867,112 912,820 971,515 1,033,991 1,100,491 1,133,349

Depreciation and Amortization 4872 4764 3997 4513 5,588 5,996 6,406 6,820 7,240

Gross profit (loss) 43,680 84,631 103,997 104,880 112,165 119,328 126,978 135,143 138,961

Operating Expenses:

Selling 16,837 18,318 18,293 19,161 18,658 18,486 18,216 17,835 18,367

General & administrative 17,267 21,887 22,424 25,838 23,162 23,280 23,318 23,265 23,960

Impairment (Gain on sale) of real estate 50 28 (629) 462 - - - - -

Total operating expenses 34,154 40,233 40,088 45,461 41,820 41,767 41,534 41,100 42,327

Operating income (loss) 9,526 44,398 63,909 59,419 70,345 77,561 85,443 94,043 96,634

Non-operating income (expense) 581 696 768 115 115 115 115 115 115

Income (loss) before income taxes 10,107 45,094 64,677 59,534 70,460 77,676 85,558 94,158 96,749

Provision (benefit) for taxes (34,865) 13,141 19,624 18,324 21,843 24,080 26,523 29,189 29,992

Net income (loss) 44,972 31,953 45,053 41,210 48,618 53,597 59,035 64,969 66,757

Weighted average shares outstanding - basic 29,145 28,075 27,430 26,941 27,287 26,638 26,031 25,498 25,002

Net income (loss) per share - basic 1.54 1.14 1.64 1.53 1.78 2.01 2.27 2.55 2.67

Dividends Paid - - - 9,765 11,522 12,702 13,991 15,398 15,821

Dividends per Share - - - 0.36 0.43 0.47 0.53 0.59 0.62

Payout Ratio - - - 23.70% 23.70% 23.70% 23.70% 23.70% 23.70%


Balance Sheet


Current Assets:

Cash & cash equivalents 62,683 64,277 57,804 70,239 102,657 119,454 139,807 163,114 192,327

Receivables, net 22,726 29,145 69,699 66,936 47,648 50,712 53,973 57,444 59,159

Inventories, net 87,094 112,541 112,848 112,165 133,028 141,582 150,687 160,378 165,167

Investment in operating leases - - 15,978 - - - - - -

Prepaid expenses & other assets 4,509 8,277 5,718 6,882 8,819 9,387 9,990 10,633 10,950

Income taxes receivable 1,603 1,868 5 - - - - - -

Deferred income taxes 8,453 7,742 9,641 9,995 8,612 8,612 8,612 8,612 8,612

Total current assets 187,068 223,850 271,693 266,217 300,765 329,747 363,069 400,181 436,215

Property, plant & equipment, gross 150,031 151,322 151,566 166,242 174,554 183,282 192,446 202,068 212,172

Less accumulated depreciation (130,053) (131,056) (126,431) (128,992) (134,580) (140,576) (146,982) (153,801) (161,041)

Property, plant & equipment, net 19,978 20,266 25,135 37,250 39,975 42,706 45,464 48,267 51,130

Assets held for sale 550 - - - - - - - -

Long-term investments 9,074 2,108 - - - - - - -

Investment in life insurance 23,127 25,051 25,126 26,172 30,540 30,502 30,332 30,014 30,910

Deferred income taxes 30,520 25,649 24,029 21,994 19,152 16,310 13,468 10,626 7,784

Goodwill 1,228 1,228 1,228 1,228 1,228 1,228 1,228 1,228 1,228

Amortizable intangible assets 641 - - - - - - - -

Other assets 13,886 10,993 11,091 9,313 9,444 9,577 9,713 9,849 9,988

TOTAL ASSETS 286,072 309,145 358,302 362,174 401,104 430,070 463,273 500,166 537,256

Accounts payable 24,920 28,142 33,111 33,158 36,650 38,904 41,303 43,857 45,119

Income taxes payable 348 - 2,927 2,314 1,714 1,114 514 - -

Accrued Expenses:

Accrued compensation 16,038 22,101 20,763 18,346 25,212 26,833 28,559 30,395 31,303

Operating lease repurchase obligations - - 16,050 - - - - - -

Product warranties 6,990 8,443 9,501 11,254 10,409 11,078 11,790 12,549 12,923

Self-insurance 4,137 4,531 4,941 6,242 5,387 5,734 6,103 6,495 6,689

Accrued Loss on repurchases 627 1,287 2,212 1,329 2,147 2,285 2,432 2,588 2,665

Promotional 2,661 1,910 3,205 3,149 2,736 2,710 2,671 2,615 2,693

Other accrued expenses 5,297 3,940 7,009 5,818 6,547 6,538 6,502 6,434 6,626

Total current liabilities 61,018 70,354 99,719 81,610 90,801 95,197 99,874 104,933 108,019

Unrecognized tax benefits 5,228 3,988 3,024 2,511 3,366 3,711 4,087 4,498 4,622

Postretirement health care & deferred compensations benefits 75,135 64,074 62,811 57,090 64,879 65,210 65,316 65,167 67,112

Total long-term liabilities 80,363 68,062 65,835 59,601 68,244 68,921 69,403 69,664 71,734

Stockholders' Equity:

Capital stock common 54,384 55,222 57,560 57,906 57,906 57,906 57,906 57,906 57,906

Retained earnings 477,490 509,443 554,496 585,941 623,036 663,930 708,974 758,546 809,481

Accumulated other comprehensive income (loss) (3,686) 849 (1,808) (2,274) (2,274) (2,274) (2,274) (2,274) (2,274)

Treasury stock, at cost (383,497) (394,785) (417,500) (420,610) (436,610) (453,610) (470,610) (488,610) (507,610)

Total stockholders' equity 144,691 170,729 192,748 220,963 242,058 265,952 293,996 325,568 357,503

TOTAL LIABILITIES & STOCKHOLDERS' EQUITY 286,072 309,145 358,302 362,174 401,103 430,069 463,273 500,166 537,256


Cash Flow Statement


NET INCOME 44,972 31,953 45,053 41,210 48,618 53,597 59,035 64,969 66,757

Adjustments

Cashflows from Operations:

Depreciation & Amortization 4,872 4,764 3,997 4,513 5,588 5,996 6,406 6,820 7,240

Deferred Income Taxes (7,804) 711 (1,899) (354) 1,383 - - - -

Gross Cash from Operations 42,040 37,428 47,151 45,369 55,588 59,593 65,441 71,789 73,997

Changes In Working Capital Accounts:

Change in Receivables (2,745) (6,419) (40,554) 2,763 19,288 (3,064) (3,261) (3,471) (1,715)

Change in Inventory (17,929) (25,447) (307) 683 (20,863) (8,554) (9,105) (9,691) (4,788)

Change in Prepaid Expenses & Others (282) (3,768) 2,559 (1,164) (1,937) (567) (604) (643) (317)

Change in Income Tax Receivable (78) (265) 1,863 5 - - - - -

Change in Deferred Income Tax (30,520) 4,871 1,620 2,035 2,842 2,842 2,842 2,842 2,842

Change in Accounts Payable 3,310 3,222 4,969 47 3,492 2,254 2,399 2,554 1,262

Change in Income Tax Payable 244 (348) 2,927 (613) (600) (600) (600) (514) -

Change in Accrued Compensation 5,197 6,063 (1,338) (2,417) 6,866 1,621 1,726 1,837 908

Change in Product Warranties (345) 1,453 1,058 1,753 (845) 669 712 758 375

Change in Self-insurance 934 394 410 1,301 (855) 346 369 392 194

Change in Promotional 484 (751) 1,295 (56) (413) (25) (40) (56) 78

Change in Other Accrued Expenses 423 (1,357) 3,069 (1,191) 729 (8) (36) (68) 192

Change in Unrecognized tax benefit (159) (1,240) (964) (513) 855 345 377 411 124

Change in Post Retirement Healthcare and Comp. Benefit 643 (11,061) (1,263) (5,721) 7,789 331 106 (149) 1,946

Change in Working Capital (40,823) (34,653) (24,656) (3,088) 16,346 (4,409) (5,115) (5,798) 1,099

Cash from Operations 1,217 2,775 22,495 42,281 71,934 55,184 60,326 65,990 75,096

Cash from Investing Activities:

Change in Investment in Operating Lease - - (15,978) 15,978 - - - - -

Change in Gross PPE (821) (1,291) (244) (14,676) (8,312) (8,728) (9,164) (9,622) (10,103)

Change in Assets held for sale 50 550 - - - - - - -

Change in long-term investments 1,553 6,966 2,108 - - - - - -

Change in Investment in Life Insurance 542 (1,924) (75) (1,046) (4,368) 39 170 318 (896)

Change in Goodwill - - - - - - - - -

Change in Amortizable Intangible Assets - - - - - - - - -

Change in Other Assets 1,754 2,893 (98) 1,778 (131) (133) (135) (137) (139)

Change in Operating Lease Repurchase Obligations - - 16,050 (16,050) - - - - -

Change in Accrued Loss Repurchases (547) 660 925 (883) 818 138 147 156 77

Change in Cash from Investing 2,531 7,854 2,688 (14,899) (11,994) (8,684) (8,982) (9,285) (11,061)

Cash from Financing:

Payment of Dividends - - - (9,765) (11,522) (12,702) (13,991) (15,398) (15,821)

Proceeds from issue of common stock (ESOP) (1,635) 838 2,338 346 - - - - -

Repurchase of common stock (treasury stock) (4,144) (11,288) (22,715) (3,110) (16,000) (17,000) (17,000) (18,000) (19,000)

Change in Accumulated other comprehensive income (3,232) 4,535 (2,657) (466) - - - - -

Change in Cash from Financing (9,011) (5,915) (23,034) (12,995) (27,522) (29,702) (30,991) (33,398) (34,821)

Beginning Cash Balance 69,307 62,683 64,277 57,804 70,239 102,657 119,454 139,807 163,114

Change in Cash (5,263) 4,714 2,149 14,387 32,418 16,797 20,353 23,308 29,213

Ending Cash Balance 64,044 67,397 66,426 72,191 102,657 119,454 139,807 163,114 192,327


Common Size Income Statement


Net revenues 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Cost of goods sold 91.65% 88.87% 88.57% 88.80% 88.57% 88.57% 88.57% 88.57% 88.57%

Depreciation and Amortization 0.84% 0.59% 0.42% 0.46% 0.54% 0.55% 0.55% 0.55% 0.57%

Gross profit (loss) 7.51% 10.54% 11.00% 10.74% 10.88% 10.88% 10.88% 10.88% 10.86%

Operating Expenses:

Selling 2.89% 2.28% 1.94% 1.96% 1.81% 1.69% 1.56% 1.44% 1.44%

General & administrative 2.97% 2.73% 2.37% 2.65% 2.25% 2.12% 2.00% 1.87% 1.87%

Gain (loss) on sale of real estate 0.01% 0.00% -0.07% 0.00 - - - - -

Total operating expenses 5.87% 5.01% 4.24% 4.66% 4.06% 3.81% 3.56% 3.31% 3.31%

Operating income (loss) 1.64% 5.53% 6.76% 6.08% 6.83% 7.07% 7.32% 7.57% 7.55%

Non-operating income (expense) 0.10% 0.09% 0.08% 0.00 0.00 0.00 0.00 0.00 0.00

Income (loss) before income taxes 1.74% 5.61% 6.84% 6.10% 6.84% 7.08% 7.33% 7.58% 7.56%

Provision (benefit) for taxes -5.99% 1.64% 2.08% 1.88% 2.12% 2.20% 2.27% 2.35% 2.34%

Net income (loss) 7.73% 3.98% 4.77% 4.22% 4.72% 4.89% 5.06% 5.23% 5.22%


Common Size Balance Sheet


Current Assets:

Cash & cash equivalents 10.78% 8.00% 6.12% 7.19% 9.96% 10.89% 11.98% 13.13% 15.03%

Receivables, net 3.91% 3.63% 7.37% 6.85% 4.62% 4.62% 4.62% 4.62% 4.62%

Inventories, net 14.97% 14.01% 11.94% 11.49% 12.91% 12.91% 12.91% 12.91% 12.91%

Investment in operating leases - - 1.69% - - - - - -

Prepaid expenses & other assets 0.78% 1.03% 0.60% 0.70% 0.86% 0.86% 0.86% 0.86% 0.86%

Income taxes receivable 0.28% 0.23% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Deferred income taxes 1.45% 0.96% 1.02% 1.02% 0.84% 0.79% 0.74% 0.69% 0.67%

Total current assets 32.16% 27.87% 28.75% 27.26% 29.18% 30.06% 31.10% 32.21% 34.09%

Property, plant & equipment, gross 25.79% 18.84% 16.04% 17.02% 16.94% 16.71% 16.49% 16.26% 16.58%

Less accumulated depreciation -22.36% -16.32% -13.38% -13.21% -13.06% -12.82% -12.59% -12.38% -12.59%

Property, plant & equipment, net 3.43% 2.52% 2.66% 3.81% 3.88% 3.89% 3.89% 3.88% 4.00%

Assets held for sale 0.09% - - - - - - - -

Long-term investments 1.56% 0.26% - - - - - - -

Investment in life insurance 3.98% 3.12% 2.66% 2.68% 2.96% 2.78% 2.60% 2.42% 2.42%

Deferred income taxes 5.25% 3.19% 2.54% 2.25% 1.86% 1.49% 1.15% 0.86% 0.61%

Goodwill 0.21% 0.15% 0.13% 0.13% 0.12% 0.11% 0.11% 0.10% 0.10%

Amortizable intangible assets 0.11% - - - - - - - -

Other assets 2.39% 1.37% 1.17% 0.95% 0.92% 0.87% 0.83% 0.79% 0.78%

TOTAL ASSETS 49.18% 38.49% 37.91% 37.09% 38.92% 39.21% 39.69% 40.26% 41.99%

Accounts payable 4.28% 3.50% 3.50% 3.40% 3.56% 3.55% 3.54% 3.53% 3.53%

Income taxes payable 0.06% - 0.31% 0.24% 0.17% 0.10% 0.04% 0.00% 0.00%

Accrued compensation 2.76% 2.75% 2.20% 1.88% 2.45% 2.45% 2.45% 2.45% 2.45%

Operating lease repurchase obligations - - 1.70% - - - - - -

Product warranties 1.20% 1.05% 1.01% 1.15% 1.01% 1.01% 1.01% 1.01% 1.01%

Self-insurance 0.71% 0.56% 0.52% 0.64% 0.52% 0.52% 0.52% 0.52% 0.52%

Accrued Loss on repurchases 0.11% 0.16% 0.23% 0.14% 0.21% 0.21% 0.21% 0.21% 0.21%

Promotional 0.46% 0.24% 0.34% 0.32% 0.27% 0.25% 0.23% 0.21% 0.21%

Other accrued expenses 0.91% 0.49% 0.74% 0.60% 0.64% 0.60% 0.56% 0.52% 0.52%

Total current liabilities 10.49% 8.76% 10.55% 8.36% 8.81% 8.68% 8.56% 8.45% 8.44%

Unrecognized tax benefits 0.90% 0.50% 0.32% 0.26% 0.33% 0.34% 0.35% 0.36% 0.36%

Postretirement health care & deferred compensations benefits 12.92% 7.98% 6.65% 5.85% 6.30% 5.95% 5.60% 5.24% 5.24%

Total long-term liabilities 13.82% 8.47% 6.97% 6.10% 6.62% 6.28% 5.95% 5.61% 5.61%

Capital stock common 9.35% 6.88% 6.09% 5.93% 5.62% 5.28% 4.96% 4.66% 4.53%

Retained earnings 82.09% 63.43% 58.67% 60.00% 60.46% 60.53% 60.73% 61.05% 63.26%

Accumulated other comprehensive income (loss) -0.63% 0.11% -0.19% -0.23% -0.22% -0.21% -0.19% -0.18% -0.18%

Treasury stock, at cost -65.93% -49.15% -44.17% -43.07% -42.37% -41.36% -40.31% -39.33% -39.67%

Total stockholders' equity 24.87% 21.26% 20.39% 22.63% 23.49% 24.25% 25.18% 26.20% 27.94%

TOTAL LIABILITIES & STOCKHOLDERS' EQUITY 49.18% 38.49% 37.91% 37.09% 38.92% 39.21% 39.69% 40.26% 41.99%


Value Driver Estimation


NOPLAT

Revenues 581,679 803,165 945,163 976,505 1,030,573 1,096,839 1,167,375 1,242,453 1,279,550

Less:

Cost of goods sold 533,127 713,770 837,169 867,112 912,820 971,515 1,033,991 1,100,491 1,133,349

Depreciation and Amortization 4,872 4,764 3,997 4,513 5,588 5,996 6,406 6,820 7,240

Selling Expenses 16,837 18,318 18,293 19,161 18,658 18,486 18,216 17,835 18,367

General and Administrative Expenses 17,267 21,887 22,424 25,838 23,162 23,280 23,318 23,265 23,960

Implied Interest on Operating Leases 73 57 63 2,282 10 67 67 67 67

EBITA 9,649 44,483 63,343 62,163 70,355 77,629 85,511 94,110 96,701

Less Adjusted Taxes:

Earnings Before Taxes 10,107 45,094 64,677 59,534 70,460 77,676 85,558 94,158 96,749

Current Provision for Income Taxes (116) 10,278 17,753

Marginal Tax Rate -1% 23% 27% 25% 25% 25% 25% 25% 25%

Income Tax Provision (34,865) 13,141 19,624 18,324 21,843 24,080 26,523 29,189 29,992

Gain (loss) on sale of real estate (1) 6 (173) 116 - - - - -

Non-operating income (expense) (7) 159 211 29 29 29 29 29 29

Implied Interest on Operating leases (1) 13 17 573 2 17 17 17 17

Adjusted Taxes (34,859) 12,989 19,603 18,752 21,816 24,068 26,511 29,177 29,980

Add Change in Deferred Taxes:

Deferred Tax Asset - Currrent 8,453 7,742 9,641 9,995 8,612 8,612 8,612 8,612 8,612

Deferred Tax Asset - Non-current 30,520 25,649 24,029 21,994 19,152 16,310 13,468 10,626 7,784

Net Deferred Taxes (38,973) (33,391) (33,670) (31,989) (27,764) (24,922) (22,080) (19,238) (16,396)

Change in deferred taxes (38,324) 5,582 (279) 1,681 4,225 2,842 2,842 2,842 2,842

NOPLAT 6,184 37,076 43,461 45,092 52,764 56,403 61,842 67,775 69,563

INVESTED CAPITAL

Net Operating Working Capital :

Normal Cash 11,634 16,063 18,903 19,530 20,611 21,937 23,347 24,849 25,591

Receivables, net 22,726 29,145 69,699 66,936 47,648 50,712 53,973 57,444 59,159

Inventories, net 87,094 112,541 112,848 112,165 133,028 141,582 150,687 160,378 165,167

Investment in operating leases - - 15,978 - - - - - -

121,454 157,749 217,428 198,631 201,288 214,231 228,007 242,671 249,917

Accounts payable 24,920 28,142 33,111 33,158 36,650 38,904 41,303 43,857 45,119

Income taxes payable 348 - 2,927 2,314 1,714 1,114 514 - -

Accrued compensation 16,038 22,101 20,763 18,346 25,212 26,833 28,559 30,395 31,303

Operating lease repurchase obligations - - 16,050 - - - - - -

Product warranties 6,990 8,443 9,501 11,254 10,409 11,078 11,790 12,549 12,923

Accrued Loss on repurchases 627 1,287 2,212 1,329 2,147 2,285 2,432 2,588 2,665

Promotional 2,661 1,910 3,205 3,149 2,736 2,710 2,671 2,615 2,693

Other accrued expenses 5,297 3,940 7,009 5,818 6,547 6,538 6,502 6,434 6,626

56,881 65,823 94,778 75,368 85,414 89,463 93,771 98,438 101,330

Net Operating Working Capital 64,573 91,926 122,650 123,263 115,874 124,768 134,236 144,233 148,587

Net PPE 19,978 20,266 25,135 37,250 39,975 42,706 45,464 48,267 51,130

Amortizable intangible assets 641 - - - - - - - -

Present Value of Operating Leases 1,784 1,969 71,079 300 2,646 2,826 3,009 3,194 3,384

2,425 1,969 71,079 300 2,646 2,826 3,009 3,194 3,384

Invested Capital 86,976 114,161 218,864 160,814 158,494 170,300 182,709 195,694 203,101

RETURN ON INVESTED CAPITAL (ROIC)

NOPLAT 6,184 37,076 43,461 45,092 52,764 56,403 61,842 67,775 69,563

Invested Capital t-1 76,549 86,976 114,161 218,864 160,814 158,494 170,300 182,709 195,694

ROIC 8.08% 42.63% 38.07% 20.60% 32.81% 35.59% 36.31% 37.09% 35.55%

FREE CASH FLOW (FCF)

NOPLAT 6,184 37,076 43,461 45,092 52,764 56,403 61,842 67,775 69,563

Invested Capital 86,976 114,161 218,864 160,814 158,494 170,300 182,709 195,694 203,101

Δ Invested Capital 10,427 27,186 104,703 (58,051) (2,319) 11,806 12,409 12,985 7,407

FCF (4,243) 9,890 (61,242) 103,142 55,083 44,597 49,432 54,790 62,156

ECONOMIC PROFIT (EP)

BEG. IC 76,549 86,976 114,161 218,864 160,814 158,494 170,300 182,709 195,694

ROIC - WACC (0.04) 0.30 0.26 0.08 0.20 0.23 0.24 0.25 0.23

EP (3,386) 26,202 29,188 17,729 32,659 36,588 40,550 44,933 45,097


Weighted Average Cost of Capital (WACC) Estimation

Risk Free Rate 2.95%

Market Risk Premium 4.85%

Beta 2.22


Risk Free Rate - 30 Yr US Treasury 2.95%

Corporate Spread - Investment Grade (Auto Industry) 0.26%

Pretax Cost of Debt 3.21%

Marginal Tax Rate 25.12%

After tax Cost of Debt 2.40%

Equity :

Stock Price $21.7

No. of Shares Outstanding 26980

Market Value (Thousands) $584,926

Debt:

PV of Operating Leases 71078.9

Short Term Debt 0

Long term Debt 0

Total Value of Debt $71,078.9

Total Value $656,005.26

Equity Weight 89.2%

Debt Weight 10.8%

WACC 12.50%

Cost of Equity (CAPM)

Cost of Debt

Weights


Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs:

CV Growth 3.03%

CV ROIC 0.36

WACC 12.50%


Fiscal Years Ending Aug. 30 2015E 2016E 2017E 2018E 2019E 2020E

DCF Model

Free Cash Flow 103142 55083 44597 49432 54790 62156

Continuing Value 671931

Periods to Discount 1 2 3 4 5

Discounted Free Cash flow 91680 43521 31320 30858 403241

Sum of Discounted FCF 600621

Add:

Excess Cash 38901

Prepaid expenses & other assets 5718

Income taxes receivable 5

Deferred income taxes-current 9641

Investment in life insurance 25126

Deferred income taxes: long-term 24029

Other assets 11091

Less:

Self-insurance 4941

PV of Operating Leases 71079

Equity Value 639111

Shares Outstanding ('000) 26980.0

Share Price @ Dec. 2014 23.69

Share Price Today 21.68

EP ModelFiscal Years Ending 2015E 2016E 2017E 2018E 2019E 2020E

Invested Capital 218864

Economic Profit 17729 32659 36588 40550 44933 45097

Continuing Value 476236.27

Periods to Discount 1 2 3 4 5 6

Discounted EP 15759 25804 25695 25314 289185

Sum of Discounted EP 381756

Invested Capital 218864

Add:

Excess Cash 38901

Prepaid expenses & other assets 5718

Income taxes receivable 5

Deferred income taxes-current 9641

Investment in life insurance 25126

Deferred income taxes: long-term 24029

Other assets 11091

Less:

Self-insurance 4941

PV of Operating Leases 71079

Equity Value 639111

Shares Outstanding ('000) 26980.0

Share Price @ Dec. 2014 23.69

Share Price Today 21.68

Today 11/2/2015

Next FYE 8/31/2016

Last FYE 8/31/2015

Days in FY 366

Days to FYE 63

Elapsed Fraction 0.172

R* 12.09%

Price Today ( 8 months time elapse) $24.16

Target Year-end Price (Dec. 2015) 24.42$


Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending Aug. 30 2015E 2016E 2017E 2018E 2019E 2020E

EPS 1.53$ 1.78$ 2.01$ 2.27$ 2.55$ 2.67$

Key Assumptions

CV growth 3.03%

CV ROE 20.50%


Future Cash Flows

P/E Multiple (CV Year) 7.97

EPS (CV Year) 2.67$

Future Stock Price 21.27$

Dividends Per Share 0.36 0.43 0.47 0.53 0.59

Discounting Periods 1 2 3 4 5

Discounted Cash Flows 0.31 0.33 0.32 0.31 11.49

Intrinsic Value 12.76$

Today 11/2/2015

Next FYE 8/31/2016

Last FYE 8/31/2015

Days in FY 366

Days to FYE 63

Elapsed Fraction 0.172

R* 12.09%

Price Today ( 8 months time elapse) $13.02

Target Year-end Price (Dec. 2015) 13.59$

Winnebago Industries Inc.Relative Valuation Models

EPS EPS Est. 5yrTicker Company Price 2015E 2016E P/E 15 P/E 16 EPS gr. PEG 15 PEG 16

THO Thor Industries $54.12 $4.07 $4.64 13.3 11.7 20.000 0.66 0.58

PATK Patrick Industries $44.33 $2.49 $3.18 17.8 13.9 15.000 1.19 0.93

STS Supreme Industries $8.11 $0.64 $0.84 12.7 9.7 10.500 1.21 0.92

HOG Harley-Davidson Inc. $54.78 $4.05 $4.63 13.5 11.8 10.800 1.25 1.10

JOUT Johnson Outdoors $22.71 $0.88 $1.70 25.8 13.4 20.000 1.29 0.67 SPAR Spartan Motors $4.17 $0.07 $0.19 59.6 21.9 10.000 5.96 2.19

Average 16.6 12.1 1.1 0.8

WGO Winnebago Industries Inc. $21.68 1.53 1.78 14.2 12.2 9.212 1.5 1.3

Implied Value:

Relative P/E (EPS15) $ 25.42

Relative P/E (EPS16) 21.54$

PEG Ratio (EPS15) 15.79$

PEG Ratio (EPS16) 13.77$


Key Management Ratios


Liquidity Ratios

Current Ratio

Current Assets/Current Liabilities 3.07 3.18 2.72 3.26 3.31 3.46 3.64 3.81 4.04

Quick Ratio

Current Assets - Inventories/Current

Liabilities 3.07 3.18 2.72 3.26 3.31 3.46 3.64 3.81 4.04

Cash Ratio

Cash & Cash equivalents/Current

Liabilities 1.03 0.91 0.58 0.86 1.13 1.25 1.40 1.55 1.78

Activity or Asset-Management Ratios

Total Asset Turnover

Net Sales/Avg. Total Assets 2.21 2.70 2.83 2.71 2.70 2.64 2.61 2.58 2.47

Inventory Turnover

Cost of Sales/Avg. Inventory 6.82 7.15 7.43 7.71 7.45 7.08 7.08 7.08 6.96

Financial Leverage RatiosLT Liabilities Ratio

Total Long-term Liabilities/Total

Assets 0.28 0.22 0.18 0.16 0.17 0.16 0.15 0.14 0.13

Equity Multiplier

Total Assets/Total Equity 1.98 1.81 1.86 1.64 1.66 1.62 1.58 1.54 1.50

Profitability Ratios

Gross Profit Margin

Gross Profit/Net Sales 7.51% 10.54% 11.00% 10.74% 10.88% 10.88% 10.88% 10.88% 10.86%

Net Profit Margin

Net Income/Net Sales 7.73% 3.98% 4.77% 4.22% 4.72% 4.89% 5.06% 5.23% 5.22%

ROA

Net Income/Avg. Total Assets 17.10% 10.74% 13.50% 11.44% 12.74% 12.90% 13.22% 13.49% 12.87%

ROE

Net Income/Avg. Total Equity 35.49% 20.26% 24.79% 19.92% 21.00% 21.10% 21.09% 20.97% 19.55%

Payout Policy Ratios

Dividend Payout

Dividends/Net Income 0.00% 0.00% 0.00% 23.27% 24.00% 23.14% 23.16% 23.21% 23.24%

Retention Ratio

(Net Income-Dividends)/Net Income 100.00% 100.00% 100.00% 76.73% 76.00% 76.86% 76.84% 76.79% 76.76%

Total Payout

(Dividends + Treasury

Repurchases)/Net Income 9.21% 35.33% 50.42% 31.24% 56.61% 55.42% 52.50% 51.41% 52.16%

24.42$ 0.0153 0.0203 0.0253 0.0303 0.0353 0.0403 0.0453

2.0725 24.330 24.828 25.380 25.994 26.682 27.458 28.340

2.1225 23.881 24.350 24.868 25.444 26.086 26.809 27.628

2.1725 23.451 23.893 24.380 24.919 25.520 26.194 26.955

2.2225 23.038 23.454 23.912 24.419 24.981 25.611 26.319

2.2725 22.641 23.034 23.465 23.941 24.468 25.056 25.716

2.3225 22.260 22.630 23.036 23.484 23.978 24.529 25.145

2.3725 21.892 22.242 22.625 23.046 23.511 24.026 24.602

24.42$ 0.0145 0.0195 0.0245 0.0295 0.0345 0.0395 0.0445

0.0051 27.689 26.223 24.926 23.771 22.735 21.801 20.956

0.0081 27.961 26.473 25.157 23.984 22.933 21.986 21.128

0.0111 28.236 26.726 25.390 24.200 23.134 22.173 21.303

0.0141 28.514 26.981 25.626 24.419 23.337 22.362 21.479

0.0171 28.795 27.240 25.865 24.640 23.542 22.553 21.658

0.0201 29.079 27.501 26.106 24.863 23.750 22.747 21.838

0.0231 29.367 27.766 26.350 25.089 23.960 22.942 22.021

24.42$ 0.0070 0.0100 0.0130 0.0160 0.0190 0.0220 0.0250

0.1073 24.110 24.157 24.204 24.251 24.298 24.345 24.392

0.1173 24.166 24.213 24.260 24.307 24.354 24.401 24.449

0.1273 24.221 24.268 24.316 24.363 24.410 24.458 24.505

0.1373 24.276 24.324 24.371 24.419 24.466 24.513 24.561

0.1473 24.331 24.379 24.426 24.474 24.521 24.569 24.616

0.1573 24.386 24.433 24.481 24.529 24.576 24.624 24.671

0.1673 24.440 24.488 24.535 24.583 24.631 24.679 24.726

24.42$ 0.0145 0.0195 0.0245 0.0295 0.0345 0.0395 0.0445

2.0725 30.773 28.970 27.390 25.994 24.752 23.641 22.641

2.1225 29.977 28.271 26.772 25.444 24.259 23.196 22.238

2.1725 29.225 27.609 26.185 24.919 23.788 22.770 21.851

2.2225 28.514 26.981 25.626 24.419 23.337 22.362 21.479

2.2725 27.840 26.384 25.093 23.941 22.905 21.970 21.122

2.3225 27.201 25.817 24.585 23.484 22.492 21.595 20.779

2.3725 26.594 25.276 24.101 23.046 22.095 21.233 20.449

24.42$ 0.0051 0.0081 0.0111 0.0141 0.0171 0.0201 0.0231

0.1073 23.607 23.819 24.034 24.251 24.470 24.692 24.917

0.1173 23.662 23.875 24.090 24.307 24.527 24.750 24.975

0.1273 23.716 23.929 24.145 24.363 24.584 24.807 25.032

0.1373 23.771 23.984 24.200 24.419 24.640 24.863 25.089

0.1473 23.824 24.038 24.255 24.474 24.695 24.919 25.146

0.1573 23.878 24.092 24.309 24.529 24.751 24.975 25.202

0.1673 23.931 24.146 24.363 24.583 24.806 25.031 25.258

CV Growth Rate

Risk-Free Rate

Infl

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n R

ate

Unit Sales Growth

Co

st o

f Eq

uit

y

Risk-Free Rate

Inflation Rate

Bet

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ost

of

Equ

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Bet

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Documents

Winnebago Industries Inc. (WGO) September 21, 2015tippie.biz.uiowa.edu/henry/reports15/WGO_fa15.pdf · 2015. 11. 19. · Important disclosures appear on the last page of this report