Frank K. Martin, CFA

The Future of America’s Economy…

… Looks A Lot like Elkhart, Indiana, proclaimed the Wall Street Journal on April 13, 2018 in a feature story about the RV manufacturing hub. It is with some authority that I commend Bob Davis’ reporting as anything but fake news. Thorough and perceptive, Davis captured well not only a defining swath of life in Elkhart, my home town, but perhaps a message to a much broader audience.

On a personal note, I’ve participated in the lifestyle for which Elkhart is known nationwide. In the early days it was pop-up tent camping/vacationing with my family on the sand-duned shores of Lake Michigan. Later, we logged 80,000 miles touring the country from corner to corner via backroads in a 21-foot Roadtrek Class B motorhome. State parks were our way stations and the remarkable national parks our destinations. Last year, as a lifecycle concession, my wife and I became more-or-less destination RVer’s in a 40-foot Class A motorhome. For the second year running, we will winter in the middle of nowhere at an extraordinary oasis—in the most expansive sense of the word. Professionally-speaking, although size has its disadvantages, the “Beast”, as my wife and chauffeur extraordinaire affectionately calls it, is outfitted with a complete workstation. If my posts during the frigid months have a suspiciously sunny demeanor, you’ll know why. A virtual condo on wheels…

Cyclical or Secular?

Enamored as one might be with the part-time vagabond lifestyle and the cross-section of Americana you embrace along the way, the RV industry is, well, the RV industry! Hyperbolic and loquacious, Marcus Lemonis, the chairman and CEO of the industry’s largest retailer, Camping World, paltered during the company’s Q1 earnings conference call.[1] “If cyclicality is something that people don’t have a stomach for—for six months or eight months—then it is probably not a good idea to invest in the business that has heaps of cyclicality.” Please don’t take that statement out of context. The rest of the call gushed with unrestrained optimism.

To be sure, on its face the simple act of extrapolating the uptrend in RV shipments since 2010 should give any business analyst pause and put him on his guard. The cyclicality of the industry is overshadowed, however, by the full court press of pervasive optimism. The imagination is powerful. A popular campaign slogan of Herbert Hoover in 1928 was “a chicken in every pot and a car in every garage.” Could we contemporize for today? “An RV in every driveway.”

A Bit of (Mostly Recent) RV History

It’s been more than a half-century since Charles Kuralt motor-homed across America in the first of 600 editions of “On the Road,” a segment aired on the “CBS evening news with Walter Cronkite.” Americans were looking for escape from the angst of the times and Kuralt evoked a wanderlust spirit, leading to the first boom and subsequent collapse of the RV industry.

In recent years, there’s been a shift in the perceived demographic forces behind the current RV boom. Not long ago retiring baby boomers were believed to be the population driving the industry. Because of the ballooning popularity of lower-end towable units, however, millennials are the default explanation for the booming sales at present. Having observed the industry first hand over the decades, if there has been a seismic shift in Americans’ attitudes toward the RV lifestyle since 2010, it has escaped me. Could towable RVs, like the popularity of the fuel inefficient pickup trucks that tow them, be abetted by high consumer confidence, low unemployment, low interest rates, wide credit availability both wholesale and retail, stable fuel prices, and, at least through 2017, the rising stock market? As for the latter, the correlation between the S&P 500 and RV shipments is telling. Those favorable factors, along with little inflation in RV sticker prices, has made RVs the affordable option compared to, say, a lake cottage, or foreign travel in this age of terrorism and geopolitical tension.[2] Perhaps if we add a sprinkle of pixie dust, it could be, as Truck News explained to the unenlightened, as quixotic as “In many areas of the country, the truck is just the preferred lifestyle look.”

Though motorized shipments flatlined following the early 90s recession until the beginning of the Great Recession in 2007, towable shipments grew nicely at a cyclical 7% annualized rate. At the recession’s low point in 2009, towable shipments plummeted over three years to 152,400. As a sign of the extreme cyclicality of the industry, Thor estimates an astounding 455,200 towable shipments industrywide for 2018, up a modest 3% from 2017. Given that a number of the major players have grown notably through acquisition of late, one could argue that the rapid organic growth from satisfying pent-up demand post-2009 may be a thing of the past. Moreover, while far from a “car in every driveway,” a record of 9 million households owning RVs begs the question of what constitutes saturation.

If, as the WSJ suggests, the RV capital of the world is a microcosm[3] of what the American economy looks like when operating at full tilt, perhaps, as the chart on shipments makes clear, it bears watching as the industry shows early signs of tilting… over.

The chart leaves little doubt that the industry is a leading indicator for downturns in the economy at large. Thor’s estimate for 3% shipment growth in 2018, after a breath-taking 17.6% in 2017, may be worth taking seriously. In what is near the seasonal peak for shipments, May’s numbers were actually down 1.7% from a year ago. Our May 21 post, “The Data of Dating & Staying Ahead of the Curve,” emphasized that the lag between when a recession actually begins and when the National Bureau of Economic Research officially announces its arrival, is, inconveniently, often several calendar quarters later, or longer. Watch for the June shipment numbers to be released by the RVIA. If a disturbing trend should develop…

Closely tied to shipment data are inventories. While it is difficult to get an accurate and timely count, anecdotally, the inventory pipeline from manufacturer to retailer appears to provide little cushion for manufacturers if retail demand contracts.

Figure 1: S&P 500 vs Camping World Holdings (CWH)

Almost 90% of retail market share is controlled by three companies: Thor (48%), Forest River (34.1%, a wholly-owned subsidiary of Berkshire Hathaway) and Winnebago— inclusive of Grand Design— 7.1%. Camping World (Figure 1) is the largest, and only publicly traded, retailer. If the share prices of the publicly traded RV companies are themselves leading indicators, they don’t bode well. As indicated in the chart above, Camping World’s 60% stock price decline from its January highs to its recent lows is the most pronounced, and made all the more so when compared to the S&P 500. Over the same time period, Thor surrendered 44% of its market value and Winnebago, 40%.

So long as the highways and parks upon which the industry depends are available – which seems to be a near certainty – the RV industry will be a wholesome and appealing part of the American cultural and recreational landscape. As a high-ticket luxury consumer durable good, it should be noted, advisedly, its path to the future will not be linear.

 

 

[1] Misleading by “telling the truth” is so pervasive in daily life that a new term has recently been employed by psychologist to describe it: paltering. The truth is that the RV industry is cyclical. The misstatement: any cyclical downturn will only last “six or eight months” obliquely implies the consequences a downturn will be comparatively insignificant. Look at the chart elsewhere, “Longitudinal Study: Towable and Motorized Unit Shipments” from 1964 to 2018, and decide for yourself.

[2] Although product mix has not remained static, the average retail sticker price in 2010 was $36,000. In 2017 it was $35,600.

[3] According to the RV Industry Association (RVIA), the retail value of RV sold in 2017 was $20 billion.