Winnebago (WGO) is trading lower (-4%) after reporting 1Q18 (Nov) earnings this morning. You're probably familiar with Winnebago, but maybe not some of the finer details, so a little background would help. WGO is a manufacturer of recreation vehicles (RVs), which are used primarily in leisure travel and outdoor recreation activities. Specifically, the company sells motorhomes, travel trailers, fifth wheel products and transit buses.
Because RVs are a highly discretionary and large purchase, the financial performance of these companies tend to mirror the overall economy pretty closely. This is a very thin margin business with gross margins in the low-double digits and operating margins in the mid-to-high single digits. As such, these companies can easily fall into the red during down cycles.
In late 2016, WGO made a large purchase when it acquired Grand Design, which makes towable RVs, for $500 mln in cash and stock. The acquisition significantly expands WGO's exposure to the fast-growing Towables market and it creates a broader and more balanced portfolio as Motorized still makes up the vast majority of revenue. This deal helps to balance that.
Turning to the NovQ results, EPS rose 36% YoY to $0.57. Revenue jumped 83.4% year/year to $450.0 mln. Both results were better than market expectations. While that was a huge jump in revenue, keep in mind that the Grand Design acquisition accounted for a lot of that increase.
Breaking it down by segment, revenue for the Motorized segment was $190.4 mln, down 2.4% YoY, while adjusted EBITDA margin decreased 400 basis points, driven by investments related to start-up of new lines and increased operational and direct materials costs. Towable revenue jumped to $259.7 mln, up $209.5 mln over the prior year, driven by the addition of $195.4 mln in revenue from the Grand Design RV acquisition and continued strong organic growth in Winnebago-branded Towable products, which increased more than 50% YoY. Segment adjusted EBITDA margin increased 530 basis points, driven by higher volumes and a favorable product mix.
WGO says it's pleased with its NovQ results, including its robust sales growth and margin improvement, as well as further progress toward becoming a larger, more profitable full-line RV provider centered around its two leading brands, Winnebago and Grand Design RV.
The company makes the point that it now has a transformed portfolio, balancing its Motorized business with a fast-growing Towable segment. It has now owned Grand Design for a year and it continues to perform well, as does the company's Winnebago-branded Towable division. On the Motorized side, profitability continues to be impacted by new product line start-up costs, ongoing expenses related to the ramp up of its West Coast production facility and an increase in direct material costs.
In sum, it's not entirely clear why the stock is trading lower today. It may be simply a sell-the-news reaction. Also, the stock has been making a huge move in recent months, it's up more than 60% just since mid-August. Investors may just be using this as an excuse to book some profits.