National RV Holdings: Good Deal or Bad Deal? - Part 2

May 21, 2007

Editor's Note: Julio Guardado, Editor and Publisher of RV Investor participated in due diligence on a consulting basis with an investor group that made an offer to purchase National RV Holdings. The offer was rejected. None of the information provided in this commentary or anywhere on our website is proprietary or confidential as it is all obtained from public sources. We have not held shares of NVH nor do we hold shares of any companies covered in our website as a matter of policy. The opinions and analysis that follows are solely those of this publication.

National RV released their first quarter 10-Q and the results were not pretty. In fact, they were well below our expectations. The company has lost half of its market share and posted a loss from continuing operations of nearly $9 million. Gross margins came in at -22% while operating expenses hit nearly 17%. In the meantime, they blew through the cash from the Country Coach sale and drew down their $15 million credit line by $5 million. If the Perris real estate deal does not close, NVH may be out of gas. But even NVH gets the $38 million they expect from the deal, we have little confidence that the company can execute a turnaround of the scope that would be required to turn a profit.

What's the size of the remaining National RV Holdings?

We really missed our estimate of the size of NVH following the divestiture of its Country Coach business. With first quarter sales of $21.9 million, they'll probably end 2007 in the $90-95 million range. That's substantially less than our prior estimate of $125 million. Wholesale unit shipments of diesel motorhomes totaled 50 in the first quarter, down 71% from the same period last year. Shipments of gas motorhomes were 165, down 55% from the previous year. Market share dropped to 2.4% of first quarter Class A motorhome shipments reported by the RVIA. Actual ASP in the first quarter was $102,000 versus our forecast of $94,000. Unit sales for the year will likely be in the range of 900 to 1,000.

Where has the Cash from the CCI sale gone?

NVH reported zero cash at the end of the quarter. Where did the $38 million go?

• $8.6 million to suppliers
• $29.0 million to debt (including $5.2 million draw-down on credit line)
• $8.4 million to operating losses

There were other puts and takes leaving a net cash availability of the $10 million left on their newly negotiated credit line of $15 million. RV Investor estimated they would have net cash available of $15 million including the credit line excluding operating losses.

Perris Real Estate Deal

The Perris Real Estate Deal has yet to close although the 10-Q filed on May 15 stated "The Company expects to successfully complete the transaction and receive funding on the May 18, 2007, the closing date." The grammar is theirs, not mine. If it closes, NVH will receive $31.8 million.

What should NVH's business look like?

The answer is profitable. Sooner, rather than later. The question is whether management can get the Company there before they burn through their credit line and, if they are lucky, the proceeds from the expected real estate deal. If we take a look at a Profit Model using the first quarter sales figure, cost of goods sold would have to be reduced by 26% and operating expenses by 70% to generate a 3% profit. They will have to run the business with about 375 employees and not lose market share. That's probably not in the cards even with NVH's announce plan to resume signing dealers. While they may generate sales in the short-run as new dealers purchase floor inventory, its not clear that the end-user demand will still be there.

What can NVH be worth?

Using the Profit Model described above, NVH should be able to generate $2.5-3.0 million of net income. A reasonable PE of 15 yields a market cap of $35-45 million. In after hours trading today, NVH's market cap dropped to just under $15 million. If the Company closes the real estate deal, it will have close to $3 per share in cash compared with the $1.44 it was trading at after hours. Investors do not think that the odds are in NVH's favor and neither do we.

NVH Outlook

Grim.

RV Investor

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