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Recession Signs Grow as Winnebago Leads U.S. RV Drop

Category: RV News
Source: Bloomberg
Publish Date: Friday, November 30, 2007
Summary: Reduced RV shipments are a bellwether of potential US recession.

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By Jeff Green

Nov. 27 (Bloomberg) -- Winnebago Industries Inc., Thor Industries Inc. and other U.S. recreational-vehicle makers will probably say shipments fell in 2007 for the first time in six years, a sign the U.S. economy may be headed for a recession.

For the past three decades, deliveries of motor homes and travel trailers have dropped before each decline in the U.S. economy, giving the $15 billion industry a reputation as a bellwether. As the U.S. housing slump worsens, gasoline prices rise and consumer confidence wanes, RV sales are forecast to slide this year and next.

Recreational vehicles "are at the swing end of discretionary spending because no one needs an RV, and certainly no one needs a new RV," said Ron Muhlenkamp, whose Muhlenkamp & Co. fund manages about $1.8 billion including shares of Winnebago, the biggest motor-home maker, and Thor, the maker of Airstream trailers. Muhlenkamp started unloading shares in 2006.

A University of Michigan forecast for the RV industry in June predicted 2008 sales would rise 3.5 percent; a revised version of the forecast today swung to a 4.8 percent decline. The revised 2008 outlook was released during the industry's largest trade show, which began today in Louisville, Kentucky.

None of the five largest recreational-vehicle makers has posted a 2007 stock gain. Riverside, California-based Fleetwood Enterprises Inc. declined 33 percent and Coachmen Industries Inc. of Elkhart, Indiana, fell 52 percent. Coburg, Oregon-based Monaco Coach Corp. dropped 35 percent, while Winnebago declined 37 percent. Thor, which hasn't had an annual loss since it was formed in 1986, slid 23 percent.

"Picking and Choosing"

"People are picking and choosing more" as interest rates rise and gasoline tops $3 a gallon, said Jim Frum, 66, a sales manager at Olathe Ford RV Center in Gardner, Kansas, who has been selling recreational vehicles since 1975. "It seems like it takes out the family-type person who runs close on the budget."

Travel trailers, which are typically towed by pickup trucks, range in price from $4,000 to $100,000, with motor homes costing $40,000 to $400,000, according to the Reston, Virginia- based Recreation Vehicle Industry Association.

RV-industry sales declines lasting two years or longer preceded recessions in the early 1980s, early 1990s and in 2001. Of 86 dealers attending the Louisville trade show, 66 said they will order fewer trailers and motor homes this year than in 2006, according to a November survey of dealers by Nashville, Tennessee-based BB&T Capital Markets.

"We remain fundamentally cautions about the space for 'big-ticket' discretionary consumer purchases of this type," BB&T analyst John Diffendal wrote in a Nov. 12 report.

Recession Risk

Three days after Diffendal's report, Goldman Sachs Group Inc. economist Jan Hatzius wrote that the credit collapse that began in August is likely to force banks, brokerages and hedge funds to cut lending by $2 trillion, risking a ``substantial recession'' in the U.S.

Crude-oil futures reached a record $99.29 on Nov. 21, while the price of regular gasoline at U.S. pumps exceeded $3 a gallon this month for the first time since July, according to the American Automobile Association.

RV shipments fell 11.1 percent through Sept. 30. Shipments will probably end the year down 10 percent, said Mack Bryan, vice president of administration at the RV industry trade group, which is holding this week's Louisville show.

"This is an industry highly sensitive to consumer spending," said Bryan, who added that demand may return toward the second half of 2008.

The University of Michigan forecast of a decline through 2008 comes on the heels of the industry's best year in three decades. In 2006, RV shipments rose 1.6 percent to 390,500 trailers and motor homes, capping five straight years of growth. That streak broke a 20-month decline.

Winnebago's Sales

Winnebago led motor-home sales declines through the first nine months with a 7.1 percent drop, including a 20 percent plunge for September, according to Grand Rapids, Michigan-based Statistical Surveys Inc.

"I can tell you that we have seen this type of industry swing over the last the three decades," Winnebago Chief Executive Officer Bruce Hertzke said in an interview today from the Louisville show, where the company is unveiling more fuel- efficient RVs to try to regain sales. One new model can go as far as 22 miles on a gallon of fuel. That's almost triple the mileage of the largest models.

"We do anticipate things will be down" next year, Hertzke said. "We do expect the market will come back."

Motor-home sales also fell in 2005 and 2006, while shipments of travel trailers rose enough to offset the decline. Now sales of trailers, more popular with lower-income buyers, are dropping as well.

Baby Boomers

Even as consumer sentiment and fuel prices damp RV sales, a wave of aging baby boomers may ride to the rescue. The industry is benefiting from the 11,000 people who turn 50 years old each day, the peak buying age for RV owners, Thor Chief Operating Officer Dicky Riegel said in an interview from New York.

"The industry is definitely not immune to macroeconomic factors, but we still have the demographic wind at our back," said Riegel, 41.

Thor will outperform the industry and still expects a 2008 fiscal-year sales gain after a decline in the 12 months ended July 31, Riegel said.

Analyst ratings on the industry are still mostly positive. Five analysts surveyed by Bloomberg in the past three months recommend buying Jackson Center, Ohio-based Thor, compared with one "sell" rating. Forest City, Iowa-based Winnebago has four "buys" and one "sell." Share-price targets for Thor range as high as $69 -- more than double today's closing price of $34 in New York Stock Exchange composite trading.

BB&T's Diffendal rates Monaco and Thor a "hold" and has "buy" ratings on Winnebago and Fleetwood.

Dropping Sales

Frum, the Kansas RV dealer, said his main goal this week at the Louisville show is to find lighter, less-expensive models that will appeal to buyers mindful of fuel prices and interest rates. His dealership, which claims to be the largest in Kansas, has been trying to reduce inventory for the past two years to control costs, and it is evident sales are tapering, Frum said. He plans to cut inventory 25 percent this year.

It may not be clear until early 2008 whether the U.S. will fall into recession, Muhlenkamp said. In the meantime, declining U.S. consumer sentiment suggests motor-home sales may drop further. The Reuters/University of Michigan final sentiment index fell in November to its lowest since October 2005, following Hurricane Katrina.

"When people are boisterous, they have good years, and when they're cautious, sales are down," Muhlenkamp said of the RV makers. "I wish I had started selling sooner."

To contact the reporter on this story: Jeff Green in Southfield, Michigan, at jgreen16@bloomberg.net.


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