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Stocks were down for the year despite
a short-lived rally in the second half of the year (see
RV Index). Wholesale
units where slightly down 0.1% while retail sales climbed 1.9% on an
ASP gain of 2.0% (Figure 1).
More RVs were shipped in the first
six months of 2006 than in the same period any other year in the
past thirty-three. Nearly 225,000 RVs were shipped in the first half
of 2006 -- 14.3 percent more than the same period last year,
according to the RVIA (see
story). The RVIA expects wholesale shipments for the year to
reach 385,500, which means only 160,500 will be shipped in the
second half, a 28% decrease half-on-half. It should be noted that
the Katrina ramp also ended in the first half of 2006, adding to the
growth and that it obviously does not represent any fundamental
changes in the RV industry.
The Recreation Vehicle Industry Association said
in November that manufacturers expect to ship 341,900 motorhomes and trailers in 2007, down 11.3% from the 385,500 they expect to ship this year and the 384,000 they
shipped in 2005 (see
story). Even with a modest ASP gain in 2007, we can still expect
a 5-10% reduction in manufacturers' revenue. With no ASP gain,
retail sales ought to come in at around $13 billion. To understand
the level of pain this will cause, contrast the 5-10% loss in
revenue with the 3% net income or 6% EBITDA the industry earns.
Given the industry's general lack of operational flexibility, we can
expect a large portion of the revenue loss to drop to the bottom
line.
While it is true that 2007 will be
the 4th largest year for RV's (Figure 2), it will also be
the 6th worst in terms of a year-to-year decrease
(Figures 3 and 4) despite relatively favorable economic conditions.
What is more troubling is the continued slide in RV spending as a
percentage of GDP (Figure 5) which has slipped significantly since
2004 from about 0.12% to 0.09%, a 33% decline.
Retail gas and diesel prices are
expected to climb slightly in 2007 with gasoline climbing 7.2% to
$2.51 per gallon and diesel fuel edging up 2.3% to $2.66, well short
of the feared $3.50 per gallon (Figure 6). The hurricane season was
mild in 2006 despite forecasts for another above average year in
terms of large storms keeping the Gulf supply flowing. Crude prices
have flattened and barring another major conflict in the Middle
East, they should remain flat or down in 2007.
Interest rates are forecast to flatten
or perhaps go slightly lower in 2007 (Figure 7) as the economy slows
and the Fed takes its itchy finger off the interest rate trigger.
The Conference Board reported in
December that consumers were consumers were more upbeat than in
November (see
story)
Those anticipating business conditions
to worsen decreased to 7.9 percent from 8.5 percent. Those expecting
business conditions to get better increased slightly to 16.3 percent
from 16.0 percent. Consumers expecting more jobs to become available
in the coming months edged up to 14.0 percent from 13.3 percent,
while those anticipating fewer jobs edged down to 15.9 percent from
16.1 percent. The proportion of consumers expecting their incomes to
increase in the months ahead declined to 19.6 percent from 22.0
percent in November. The changes while positive are within the noise
of the past year and do not represent a sea-change in consumer
confidence in our opinion as unemployment, the main fear of
consumers, is expected to remain low in 2007 (Figure 8).
In summary, 2007 will be a tough year
for the RV industry and stocks are likely to take a beating in the
first half despite a fairly good economic outlook. Given the outlook
from the RVIA however, we have turned our RV Alert Level to
RED. The economic outlook is not
likely to get better and any bad news will only place more downward
pressure on the industry. |
