S&P Global Ratings revised its outlook on Winnebago Industries Inc. to positive from stable and affirmed all ratings on the company, including its ‘B+’ issuer credit rating.
The positive outlook reflects the possibility S&P will raise its rating on Winnebago if the demand for RVs remains strong through the first half of fiscal year 2021, enabling the company to further improve leverage and build a cushion well below the 4x upgrade threshold to accommodate future potential variability from economic cycles and possible inventory corrections.
S&P wrote in a statement, “We estimate that Winnebago approximately doubled its EBITDA in its fiscal first quarter of 2021 relative to the same period last year, which reflects the robust demand for RVs and the full-year contribution from luxury RV manufacturer Newmar, which was acquired in 2019. The company’s order backlog remained high and has increased sequentially over the past several quarters, which demonstrates that retail demand is exceeding the original equipment manufacturers’ (OEMs) near-term capacity to deliver them. We believe the demand for Winnebago shipments, which consists of retail purchases and dealerships’ need to restock inventory, may not cool off until in late fiscal 2021 or early fiscal 2022.
“Our updated forecast assumes the company’s leverage will be in the 2.25x-3.50x range in fiscal years 2021 and 2022. Our previous forecast for fiscal 2021 assumed mid-single-digit percent total revenue growth, which incorporates the acquired revenue from Newmar and organic growth, and an EBITDA margin in the 7 percent-8 percent range. The demand for RVs stayed surprisingly strong through the fiscal first quarter of 2021 and we believe it will remain elevated. Therefore, we revised our total revenue growth assumption to the 20 percent to 30 percent range in fiscal year 2021. We also raised our EBITDA margin assumption to the 8 percent-9 percent range, which incorporates Winnebago’s reduced fixed costs following the closure of its Junction City factory and the transition of its motorhomes segment to a build-to-order inventory model.
“The RV Industry Association (RVIA), a trade organization representing the OEMs, anticipates that North American industry shipments could increase by almost 5 percent in calendar year 2020 and potentially by 19 percent in 2021. In addition, Winnebago’s management has suggested that the RVIA’s calendar-year 2021 forecast may be conservative. We believe the company will benefit from the elevated demand because its brands are desirable and it has a track record of taking market share, including in its Grand Design business and other motorhome products. Motorhomes also take longer to produce than other vehicles, thus the revenue contribution from these sales could materialize over the coming quarters given the company’s $1.7 billion segment backlog as of the fiscal first quarter of 2021. While backlogs are an imperfect indicator and subject to cancellation by dealers at any time without penalty, the spike suggests at least a temporary surge in demand that supports our fiscal-year 2021 forecast. We believe this increase in demand is attributable to the perception that RV travel is safer relative to other modes of travel amid the pandemic. The demand for competing travel and leisure options, including those that require flights, hotel stays, or mass gatherings, has greatly diminished this year and may be fueling the pent-up demand for RVs. The COVID-19 pandemic may also be attracting new buyers to RV travel, particularly younger and family-oriented consumers or those that can work remotely. Additionally, we believe the baby boomer demographic, which accounts for a sizeable portion of the demand for RVs, has been less affected by the currently elevated unemployment, which has tended to disproportionately impact lower-wage workers. We believe other benign factors, including historically low interest rates, government stimulus that is supporting the performance of the stock market and other related wealth effects, and low fuel costs, will further support near-term demand.”
Photo courtesy Winnebago
