Sometimes it makes sense to buy shares of a beaten down stock in hopes that a turnaround will come in short order, and sometimes it's best to avoid such a stock because there's no evidence that a turnaround is possible anytime soon. The latter is the case for motor home maker Winnebago (NYSE:WGO).
Let's dig in to some of the problematic trends for Winnebago and the RV industry. (For related reading, check out Turnaround Stocks: U-Turn To High Returns.)
Earnings Fall 73%... Ouch
In the period ended May 31, the Iowa-based company earned $3 million, or 10 cents per share. The trouble is that this is lower - 73.3% lower, to be exact - than the $11.3 million, or 35 cents per share, it earned in the comparable period a year ago. On the revenue line things weren't much prettier. Winnebago booked $139.7 million in revenue during the quarter, which is down about 39.7% from the $231.7 million it reported in the comparable period last year.
We are all familiar with the list excuses for the lackluster results: the economy stinks, gas prices are crazy, consumers are scared to spend money on anything that can't be eaten. Winnebago is in one of those industries that's been pinched by both high gas prices and lower consumer spending, and it shows.
Gross Lack Of Gross Margin
The top and bottom lines were bad, but there was a much bigger problem lurking in the earnings release - gross margin.
Winnebago generated a gross profit of $2.6 million for the quarter, well below the $26.3 million it turned in, in the comparable period last year. On a percentage basis, its gross margin declined to 1.9% from 11.3% in the same period last year. This leaves little to cover operating expenses such as SG&A. And frankly, unless it can get its revenue line rolling again, which doesn't seem too likely in the near term, I don't see how it's going to get much relief. What's going to happen if there is a price war? If Winnebago has to do any discounting at all, that razor thin margin could disappear entirely. (Take a deeper look at a company's profitability with the help of profit-margin ratios in The Bottom Line On Margins.)
Winnebago isn't the only player in this space that's seeing margin pressure. Ohio-based Thor Industries (NYSE:THO) saw its gross margins decline to 12.7% from 13% in its third quarter ended April 30. Coachmen (NYSE:COA) saw an increase over the comparable period a year ago, but its gross margin still remains weak. In its first quarter last year its gross margin stood at 1.1%. This year in Q1, it bumped up to 9%.
No Downside Protection
At quarter end, Winnebago had about $7.01 per share in cash and equivalents, inventories and property and equipment, net.
• Calculation: $46.2 million + $111 million + $46.5 million / 29 million shares.
This is important because Winnebago's shares have been under pressure for some time now, and we need to gauge just how low they could go. At the time of writing shares are down to $10.85 from $20+ just a few months ago, so we've still got a few bucks left before rock bottom.
This formula isn't set in stone, but it is how I quantify a potential bottom. It is important to remember that Winnebago's brand name, vast footprint and market position are certainly worth something, too. Still, there is room to fall. Another reason I'm not crazy about Winnebago's balance sheet is it doesn't give the company any flexibility to sell off its assets, should the need arise.
The Flip Side
There are several things that could get the stock moving again. For example, if pump prices start coming down, I think the stock could pop. An unexpected interest rate cut might also breathe some life into the shares by making the company's behemoths more affordable to finance. And finally, an increase in consumer spending could have a positive impact as well. (To learn more, check out Using Consumer Spending As A Market Indicator.)
Bottom Line
Winnebago's third-quarter results and its near-term prospects are, in a word, lousy. The industry as a whole is suffering, and Winnebago is suffering worse than most. I would avoid the temptation to bottom fish the stock.
To learn how to spot a stock with resurrection potential, read Finding Profit In Troubled Stocks.