Monaco Coach: Luxury at a value
Monaco Coach Corporation (NYSE: MNC) may be smarting now as weak consumer confidence, interest rate instability and pricey fuel stall sales of recreation vehicles. But a match made in demographic heaven--the new-look RV industry and comfort-seeking baby boomers—looks set to take hold in 2008.
Monaco’s middle name should be Luxury. Its high-end motor coaches are not complete without a Sharp LCD 37-inch TV screen, Corian solid surface kitchen and bath countertops, leather furniture, imported ceramic tile, and Ralph Lauren fabrics. They’ve got GPS systems and automatic satellite systems and big, new chassis, ready to be wheeled to one of Monaco’s motor home resorts. Enjoy the swimming pool, the golf course and all the other amenities that make life so, well, luxurious.
And costly. Suggested retail for motor coaches runs from $45,000 is $600,000; towable RVs can range from $11,000 to $80,000. Coburg, Ore.-based Monaco is the top manufacturer in Class A motor coaches (those built on the mightiest of chassis), owning 24% of the market for diesel Class A motor vehicles, based on 2006 retail registrations. Monaco also had an 8% share of the market for gas Class A motor coaches, and a 16% share of the market for all Class A motor coaches. In other categories, including the towable market, percentages fall dramatically.
As the leading maker of premium Class A vehicles, Monaco’s results have been particularly susceptible to increasing interest rates and gas prices. Just small rises in interest rates can turn consumers away from buying an RV, which many—particularly in the case of Monaco—consider to be second homes.
Credit crunches, gas prices and severe housing markets have many investors pulling up stakes on Monaco. But, with aging boomers stepping into retirement and the company’s adjustments during the ongoing two-year slump, others are accumulating shares now in anticipation of a turnaround. One is in the offing: in a late July report from market research publisher SBI, owned by MarketResearch.com, RV sales in 2008—barring unforeseen economic weakness—should rebound from just below $12.0 billion at the end of this year to $15.9 billion by 2011.
Indeed, good news may already be showing up at Monaco, whose brands include Monaco, Holiday Rambler, Beaver, Safari and R-Vision. Second-quarter revenues as of June 30 were $335 million, up 4.4% from the same quarter a year ago. Earnings were $0.15 per diluted share, up from $0.01. More than that, motorized sales—which made up 72.5% of Monaco’s revenue in 2006—were up 11%. And Monaco gained market share in Class A vehicles.
While keeping his rating on Monaco shares at “neutral,” analyst Craig Kennison at Robert Baird noted as positives the 11% gain in motorized sales, further depletion of dealer inventories and cost containment measures.
“We remain concerned that a deteriorating credit environment may delay a meaningful industry recovery, but believe downside risk is limited to the low teens, where we would accumulate shares,” he said in a research note after release of second quarter results on July 25. Kennison added that trends in July have been favorable three weeks into the current quarter.
Monaco also noted improvement in its Class A sales, despite the problems besetting that segment. Class A business was up 6% year-to-date through the quarter, compared with the overall Class A market, which industry statistics show was down 6.6%. Monaco’s strength represented gains in market share and indicated to the company that it is on track with its 2008 models.
Towable sales were below year-ago levels and the motor home resorts segment, which accounted for 2.5% of sales in 2006, were down a painful 42%. The company has two resorts—in Indio, Calif., and Las Vegas, and two under development: in Palm Springs and Naples, Fla.
Along with second quarter results, Monaco said it expects earnings of $0.37 to $0.41 for the year, based on sales near $1.3 billion, on par with last year’s revenue. Earnings per share were $0.03 in 2006, when dealers started the year with brief optimism that 2005’s slowdown was over and the hot market of 2004 would soon return. They increased orders, the market failed to improve and too many RVs never found a home. Dealers now are scared of overstocking, which has balanced supply channels.
Analyst Mike Roarke at McAdams Wright Ragen used second quarter results to raise his rating on shares to “buy” from “hold,” setting a price target of $17—a gain of about 30% from current levels. Monaco shares closed Friday at $13.61, within the 52-week range of $10.02 to $17.95.
Roarke said in a research note that he looks for earnings per share this year at $0.45, more than company guidance, and for $0.63 in 2008. Monaco’s book value is $10.57 per share, a level that should provide support, and the balance sheet is in good condition. Plus, moves Monaco has made in the two-year downturn-- including taking out two manufacturing plants to improve utilization and a recent announcement to consolidate some of its towable production--should add to earnings, said Roarke.
Robert Baird’s Kennison, despite a “neutral” rating, has his sights on an $18 target. That would give shares a P/E near 13 based on forward earnings.
For whatever demand new buyers bring, though, there are lots of companies and products for them. Monaco has more competition than beer coolers at a campground. In the motorized segment, there are Coachmen Industries, Fleetwood Enterprises, Inc. (NYSE: FLE), National R.V. Holdings, Inc. (NYSE: NVH), Thor Industries, Inc. (NYSE: THO) and Winnebago Industries, Inc. (NYSE: WGO), among others. The biggest, Thor Industries, at a market capitalization of $2.5 billion, is up about 3% this year, while Monaco, with a market cap of nearly $400 million, is down about 5%.
It’s not easy to get too fired up about Monaco considering current economic worries. But the selloff in shares should encourage aggressive investors to warm up to Monaco at today’s reasonable prices. After all, luxury at a value is hard to find.
