Winnebago Industries (WGO -2.45%) investors had a few big concerns heading into the recreational vehicle (RV) giant's latest earnings update. Rival Thor Industries (THO -1.53%) has been claiming more market share in key areas, and both companies are trying to walk a tight line between working through their backlogs and risking oversupply during any consumer spending pullback.
Winnebago this week eased some of those shareholder worries, but big risks remain heading into the second half of 2022. Let's dive right into three reasons to like the stock.
1. Strong sales trends
Winnebago's sales trends continued the positive momentum that investors have enjoyed for more than a year. Revenue jumped 52% overall thanks to rising demand across key categories like towable and motorized RVs, boats, and luxury RV brands. Part of that spike came from its recent acquisition of the Barletta brand of pontoon boats, but organic revenue also rose by a solid 41%.
Management credited increased prices and strong demand at dealerships for the sales spike. Market share ticked up, too, as it has for most of the last few years. "The trend in recent quarters continued," CEO Michael Happe said, "as Winnebago ... delivered impressive third quarter results."
2. Profitability gains
Winnebago handled supply chain disruptions and soaring costs without missing a beat. Gross profit margin improved to 18.7% of sales from 17.7% a year ago, thanks to the favorable consumer spending environment, coupled with Winnebago's dominant market position in several high-end niches. "We capitalized on the prime spring selling season," Happe said .
WGO operating margin (TTM). Data by YCharts. TTM = trailing 12 months.
Those gains helped power an 84% surge in adjusted earnings, which was a surprise given all the cost and supply chain pressures facing the RV industry today.
3. A bright outlook
It wasn't all good news in this report, though. Winnebago said it is struggling with supply chain disruptions, cost inflation, and manufacturing productivity challenges. These should continue into the fiscal fourth quarter, executives predicted.
But investors were thrilled to see the company's progress at moving through its backlog. This metric declined in the fiscal third quarter as the company was able to boost dealership inventory levels so that they are more closely aligned with demand. It's great news to see Winnebago turn more of its backlog orders -- which aren't hard commitments -- into actual sales.
There's a likely slowdown in the industry ahead, after all; competitor Thor confirmed that prediction in its earlier announcement.
Yet Winnebago is in a good position to weather that shift. Production levels are rising to support higher sales during this elevated demand period. And the company is being careful today to secure most of its backlog orders ahead of any downturn.
As a consumer discretionary stock, Winnebago is still likely to be heavily affected by a recession should one develop over the next several quarters. However, the business is currently enjoying strong demand, rising profit margins, and expanding market share. All that should help it shore up its finances as it prepares for a potential pullback in the industry after two consecutive years of unusually strong growth.
