RV STOCKS AND INDUSTRY NEWS

Thursday, November 20, 2008

RV Investor

RV Index Continues to Slump

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• Wholesale Shipments Extend Sixteen Month Downward Trend through End of 2008

• Consumer Confidence Continues to Decline as Economy Slows

• Unemployment at Historical Lows but Rising - Major Hit to Consumer Confidence

• Gross Domestic Product and Personal Consumption Spending Slowing - But no Recession

• Credit Remains Tight and Interest Rates Stable

• Fuel Prices Continue to Rise - Expect $5.00 by end of 2008

• Real Estate Market Bottoms in 2008 - But Home Equity at Record Lows

• Recreational Vehicle Sector Underperforms

• Significant Erosion in RV Index Component Financial Performance

• Outlook: RV Retail Sales in 2008 down 13.7% - Below $11 Billion - Recovery in 2009 and 2010

The RV industry continues to be pummeled in 2008 extending a sixteen month string of declining year-on-year unit shipments.  Dr. Richard Curtin, Director of Consumer Surveys at the University of Michigan projects that RV shipments will again decline in 2008 due to higher credit standards, falling household wealth, slower growth in real incomes, and diminished consumer confidence. According to Curtin and the RVIA, shipments in 2008 are expected to decline 13.7% to 305,000 units from 2007's 353,400 units. Through April, wholesale unit shipments were down 10.9%.

Consumer Confidence Continues to Decline

Unemployment at Historical Lows but Rising

Unemployment rose from 5.0 to 5.5 percent in May with a net loss of 49,000 jobs. Job losses continued in construction, manufacturing, retail and temporary services. Only health care posted a gain of 34,000 jobs meaning all other sectors lost 82,000 jobs.

Real gross domestic product increased at an annual rate of 0.9 percent in the first quarter of 2008, according to preliminary estimates released by the Bureau of Economic Analysis.  In the fourth quarter, real GDP increased 0.6 percent.

Real personal consumption expenditures increased 1.0 percent in the first quarter, compared with an increase of 2.3 percent in the fourth. 

Corporate Profits from current production (corporate profits with inventory valuation and capital consumption adjustments) increased $5.2 billion in the first quarter, in contrast to a decrease of $52.9 billion in the fourth quarter.  Current-production cash flow (net cash flow with inventory valuation and capital consumption adjustments) -- the internal funds available to corporations for investment -- increased $29.6 billion in the first quarter, in contrast to a decrease of $55.7 billion in the fourth.

General Electric announced in June that it planned to retreat from the market of lending financing for the purchase of RVs and boats. The conglomerate’s GE Money arm said it wasn’t seeing the returns it wanted in the sector, so it was opting for the exits. GE had been the third largest source of finance for retail RV customers, with about 12% of the market. That means that would-be RV'ers are going to find it more difficult to financing those purchase putting more downward pressure on RV sales.

We expect that credit will continue to tighten even though interest rates will remain low.

Fuel Prices Continue to Rise

Gasoline prices topped the $4.00 per gallon mark last week as oil prices continue to soar. RV Investor predicted in May 2007 that $5.00 per gallon gas on the horizon (story). Many cities are already over the $4.50 mark.

Analysis of potential fuel cost increases in a 2005 PKF Consulting study shows that fuel prices would need to more than triple over current (2005) levels to make RV'ing more expensive for a family of four than other forms of travel. Airfares and hotel rates are rise rapidly as fuel costs increase. “While fuel costs are a component of the overall vacation cost, fluctuations in fuel prices aren't significant enough to affect a family's decision of whether or not to take RV trips over other types of vacations," said Kannan Sankaran, PKF's lead researcher for the study.

While fuel prices represent less than 10% of the cost per mile for a high-end RV, they can be 25% or more at the lower end. As for the airfare argument, you can purchase a coast to coast round trip ticket for $700. The cost of gasoline for an RV making the same trip (5,000 miles @ 15mpg @ $4.00 per gallon) would have been almost twice the airfare at $1,333.

But RV'ing is a lifestyle and RV'ers have adjusted historically by buying smaller or used rigs or taking shorter trips.

Real Estate Market Bottoms in 2008

The crash of the real estate market will bottom in 2008 and we may see some recovery as bargain hunters re-enter the market.

The equity Americans have in their most important asset — their homes — has dropped to its lowest level since the end of World War II. According to the Fed, homeowners' portion of equity slipped to 46.2 percent in the first quarter from a revised 47.5 percent in the previous quarter. That was the fifth quarter in a row below the 50 percent mark. The total dollar value of equity also fell for the fourth straight quarter to $9.12 trillion from $9.52 trillion in the fourth quarter, while Americans' total mortgage debt rose to $10.6 trillion from $10.53 trillion.

This is perhaps one of the most significant factors weighing on the industry today.

Recreational Vehicle Sector Underperforms

The RV Stock Index fell 40% in the last 12 months making it one of the worst three performing sectors when compared with the Dow Jones indices. Only Home Construction and Recreational Products performed worst, reaching an all time low since the RV Stock Index has been tracked.

Significant Erosion in RV Index Component Financial Performance

Operating performance for the RV Index companies is down across the board. Revenue is down 20% quarter-on-quarter (Q1'08 vs. Q4'07). The industry's inability to flex downwards is apparent in the gross margin erosion, lack of operating expense control, decreasing asset turns and increasing debt. We expect continuing eroding performance given the continued softness in the retail market as a result of decreasing volumes and average sales prices.