Imagine Toyota trying to sell a ten-year old Corolla in today’s car market. A decade ago, a radio was standard in a Corolla but a CD player optional; electric windows, climate control and airbags cost extra; and fuel consumption was a distant afterthought. Despite the venerable Toyota name, such a model would struggle for attention in today's competitive market – which is why the company updates its cars every few years with new technology, designs and features.
As competitive as the car industry is, caravans are worse. In Australia, 51 car brands compete for over 1.1m units every year. In the recreational vehicle (RV) business, 80 brands fight for less than 30,000 units. What happens when a maker of RVs stops releasing updates?
Losses from RVs obscure profits elsewhere
Updated RV models released
Investment case on track
Thanks to Fleetwood, we know the answer: sales and profits collapse.
In 2006, Fleetwood’s RV business, through its caravan brands Coromal and Windsor, generated $170m in revenue and $20m in profit. Last year, RVs generated just $110m in revenue and sunk to a $10m loss. As margins and volumes have shrunk, RVs have generated consistent losses for Fleetwood even as the total RV market has expanded.
Poor results from the RV business obscure a profitable accommodation business which generated profits of $17m last year. Aggregate returns look lousy because Fleetwood is losing so much money in caravans.
Our investment case, last outlined in Fleetwood: stumbling but standing, rests on the assumption that RV losses can be stemmed and profits ultimately restored. To determine how likely that is, we need to understand what went wrong with Fleetwood’s RV business.
Fleetwood’s sin has been success. The company was minting so much cash from its accommodation business over the mining boom – it generated over $340m in profits from manufactured accommodation between 2006 and 2015 – that it neglected its staid and slower growing caravan business.
That neglect was made worse during the global financial crisis when caravan sales collapsed. Fleetwood wound back development and withheld cash from the business which meant new models weren’t released. Coromal and Windsor were stuck with an aging product range even as the caravan market rebounded.
In comparison, Coromals largest competitor, Jayco, maintained investment in product and has regularly launched new models, growing to a 50% share of the national market.
That is now changing. With debt repaid and decent cash flow pouring in from the accommodation business, management is working on repairing the RV unit.
Costs, of course, have been slashed. Two separate manufacturing facilities have been consolidated into one and more parts are imported. But Fleetwood aims to grow sales, not merely cut costs.
New divisional management, a new design team and fresh capital have poured in to update products. Distribution that was scaled back, especially on the east coast, is now expanding aggressively. This activity has consumed cash and weakened recent results. Is it worth it?
The RV market is worth almost $1bn annually. If Fleetwood can recapture historic market share of 25%, it should generate about $250m in revenue. If we assume historic margins of 8%, profits of $20m could conceivably be recaptured.
On top of around $15m in profits from the accommodation business, such profits would make Fleetwood's current valuation of $100m look very mean. Yet that's a best case scenario that is unlikely to occur.
Our own estimates are more conservative: we assume revenue of $100m and profits of $8m for the RV business in our base case. Combined with healthy accommodation profits, today’s share price would be attractive. This is reflected in our sum of the parts valuation in Table 1.
|Asset||Low valuation||Base valuation||High valuation|
Even if the caravan division merely breaks even, the current share price would imply a business on a single digit price-earnings ratio. There is plenty of potential, then, but is it likely to be fulfilled?
The Coromal Princeton, introduced to acclaim in 2004, wasn’t replaced until the introduction of the Element range in 2013 and, even then, interiors were old. Our pictures below support consistent customer feedback: Coromal designs were out of date.
Coromal has now released updated designs across its range and I was impressed after viewing the newest models at a local trade show.
As you can see from my poorly taken photos, new models mimic modern housing styles, with laminated surfaces, stainless steel and ceramic touches and modern fabrics. Technology inclusions have been improved as have appliance inclusions. For the first time in a decade, Fleetwood has the product range to compete with rivals.
Two things were clear from my trade show visit: the Coromal brand remains arguably the strongest in the industry with a stellar reputation amongst dealers and customers; and the new range of products compare favourably to the competition.
At current prices, we don’t require historic profits from RVs to be recaptured; merely eliminating losses should be enough to realise our investment case. With that likelihood higher, we are increasing our buy prices slightly. Despite rising some 60% this year, Fleetwood remains a SPECULATIVE BUY.
Disclosure: The author owns shares in Fleetwood.