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A Rocky Road for the Recreational Vehicle (and Manufactured Housing) Industry
Champion Enterprises, a producer of manufactured housing in the United States and Canada, recently filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Despite a host of cost-cutting measures, including the shuttering of a number of production facilities, the company’s financial situation deteriorated to the point that it was no longer in compliance with the financial covenants contained in its senior secured credit facility. Since the company is now in bankruptcy and hoping for a court-supervised sale of its operations, we have dropped it from coverage by The Value Line Survey. As a result, there are only three companies left in the industry that Value Line covers, (down from a high of eight companies during the late 1990s), making it unrealistic to continue the industry as it was previously configured. Therefore, Thor Industries (THO) and Winnebago (WGO) will now be reviewed as part of the Auto & Truck Industry, while Drew Industries (DW) will be moved to the Auto Parts Industry. The attrition in this industry highlights the fact that over the last few years, the fortunes of the recreational vehicle/manufactured housing companies have taken a decided turn for the worse.
Manufactured homes are constructed in factories and are financed the same way as site-built alternatives. Prior to the onset of the recent recession, manufactured housing companies were feeling the effects of excess inventory, an overabundance of retail locations, and rather lax lending standards, which resulted in an uptick in repossessions and delinquency rates.
Demand for manufactured homes mirrors the business cycle of site-built homes, and thus, manufactured housing companies have not been immune to what has been going on in the aggressive housing market. During 2008, modular home shipments fell 33.4%, while site-built homes were down 37.8%. Our 2010 view is also far from optimistic, as we do not expect any significant turnaround in housing during that period.
The recreational vehicle (RV) segment, meanwhile, has evolved in recent decades, with the growing popularity of the automobile, improving roads, and America’s love for exploration boosting demand for RVs. However, consumers typically use discretionary income to purchase RVs. When times are tough, consumers generally tighten the purse strings, choosing to focus on necessities rather than luxuries. Conversely, during periods of strong economic growth, they are much more prone to spend out on extravagant purchases. Understandably, demand for recreational vehicles has fallen off considerably since the most recent recession began in late 2007, reflecting reduced consumer confidence, previously record-high gasoline prices, and the tightening of the U.S. credit market.
Since that time, there has been significant industry-wide consolidation, with Navistar International (NAV) acquiring Monaco Coach and Berkshire Hathaway (BRKA) buying Clayton Homes. Also, Fleetwood Enterprises filed for Chapter 11 bankruptcy protection in March and has sold off its motor home and manufactured housing businesses.
Yet the news is not all bad, as demographic trends are definitely in the industry’s long-term favor. Recreational vehicle ownership generally peaks among people between the ages of 55 and 64, and since the size of that group is forecast to increase by about 45% over the next ten years, as compared to an overall population growth rate of about 8%, RV manufacturers may well be headed for a strong rebound in demand. This may be a Darwinian moment for the industry, with the remaining participants poised for success.