Source: Reuters

Source: Reuters

COVID-19 practically brought business activity to a halt in the early part of the year. The temporary shutdown of manufacturing plants was particularly harmful to the RV industry. The RV sector has roared back. RVs have given consumers a chance to travel while controlling their environment amid the pandemic. That has benefited RV-related companies like LCII Industries (LCII). In its most recent quarter, the company reported revenue of $828 million, up 41% Y/Y.

LCI Industries Q3 2020 revenue. Source: Shock Exchange

Each of the company’s major product categories experienced double-digit revenue increases. RV-related revenue (travel, trailer, fifth wheel and motorhomes) grew 32% on the strength of robust RV shipments:

RV OEM sales increased 32% year-over-year to $451million for the third quarter, primarily driven by the significant sales increase and retail demand and continuing historical momentum we saw in the second quarter.

Based on preliminary results October trends have remained very strong, with sales on track to grow by 25% over the prior year period. What is even more exciting is RVIAs most recent report on 2021 demand shows 508,000 to 520,000 unit range for wholesale, which would be a record year for the RV industry.

Management implied retail sales and new buyers drove RV sales. The sector is known to attract baby boomers. If younger buyers come into the market, then it could be a secular shift that could last years. October shipments were also strong, implying the RV segment could drive the narrative next quarter as well. The RV segment represented 56% of revenue, up from 60% in the year earlier period.

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Aftermarket sales more than doubled to $186 million. Aftermarket benefited from the rise in RV demand, particularly, the used RV market where the company supplied replacement items like furniture and mattresses. Pfizer (PFE) recently announced it had a highly-effective vaccine pursuant to COVID-19. A vaccine from Pfizer or Moderna (MRNA) could allow the economy to reopen and millions of Americans to return to the office. That could dampen RV shipments and aftermarket sales next year.

Margins Swelled

The rapid increase in scale helped LCII markedly improve margins. Gross margin was 26.8%, up 370 basis points versus that of the year earlier period. Gross profit on a dollar basis was $221 million, up 63% Y/Y. SG&A costs were $127 million, up 47% Y/Y. Transportation costs and performance-based compensation drove the rise in SG&A costs. The fallout was that EBITDA of $119 million was up 75% Y/Y. EBITDA margin was 14.4%, up 280 basis points versus the year earlier period. If management can keep SG&A costs from growing less gross profit, then EBITDA margin will likely expand further. I foresee an explosive growth in revenue in EBITDA next quarter. By the first half of 2021, RV shipments and LCII’s revenue could cool as the economy reopens.

Solid Liquidity

Cyclical businesses like LCII must maintain liquidity in order to stave off a potential downturn in the economy. The global economy was slowing prior to the pandemic. Liquidity is particularly important for smaller companies like LCII. The company ended the quarter with $68 million in cash, up from $35 million at year-end. Working capital was $395 million, slightly down from $400 million at year-end. However, working capital appeared robust enough to support LCII for several quarters.

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Free cash flow (“FCF”) through the first nine months of the fiscal year was $183 million, up from $162 million in the year earlier period. Positive FCF portends the company’s liquidity should grow over time. Capital expenditures were $29 million through the first nine months of the year, down from $48 million in the year earlier period. Cutting capital expenditures amid rising revenue and EBITDA is another way to increase cash flow. LCII recently acquired a majority stake in Challenger Door, a leading supplier of branded doors to the RV industry. LCII remains well-positioned to benefit from consolidation in the RV sector without compromising liquidity.

Conclusion

LCII has an enterprise value of $3.9 billion and trades at 11.8x run-rate EBITDA (last two quarters annualized). RV shipments could face headwinds after the economy reopens next year. I rate LCII a hold.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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