Shareholders of Winnebago would probably like to forget the past six months even happened. The stock dropped 22.8% and now trades at $30.81. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy Winnebago, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Winnebago Will Underperform?
Even though the stock has become cheaper, we’re cautious about Winnebago. Here are three reasons why there are better opportunities than WGO, plus one stock we’d rather own.
1. Revenue Spiraling Downwards
A company’s long-term performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Winnebago’s demand was weak over the last five years as its sales fell at a 3.2% annual rate. This wasn’t a great result and signals it’s a low quality business.
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Winnebago, its EPS declined by 22.9% annually over the last five years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Over the last few years, Winnebago’s ROIC has unfortunately decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
We cheer for all companies making their customers lives easier, but in the case of Winnebago, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 14.6× forward P/E (or $30.81 per share). This valuation tells us a lot of optimism is priced in - you can find more timely opportunities elsewhere. We’d recommend looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
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