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Dissecting the Numbers for Winnebago Industries, Inc. (WGO) and REV Group, Inc. (REVG)

Winnebago Industries, Inc. (NYSE:WGO) and REV Group, Inc. (NYSE:REVG) are the two most active stocks in the Recreational Vehicles industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.

Growth

The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect WGO to grow earnings at a 6.00% annual rate over the next 5 years. Comparatively, REVG is expected to grow at a 22.18% annual rate. All else equal, REVG’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns



Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. Winnebago Industries, Inc. (WGO) has an EBITDA margin of 9.68%, compared to an EBITDA margin of 1.71% for REV Group, Inc. (REVG). This suggests that WGO underlying business is more profitable. WGO’s ROI is 16.80% while REVG has a ROI of 11.50%. The interpretation is that WGO’s business generates a higher return on investment than REVG’s.

Cash Flow 

Cash is king when it comes to investing. WGO’s free cash flow (“FCF”) per share for the trailing twelve months was +1.77. Comparatively, REVG’s free cash flow per share was -0.67. On a percent-of-sales basis, WGO’s free cash flow was 0.01% while REVG converted -2.22% of its revenues into cash flow. This means that, for a given level of sales, WGO is able to generate more free cash flow for investors.




Liquidity and Financial Risk

Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. WGO has a current ratio of 1.70 compared to 2.10 for REVG. This means that REVG can more easily cover its most immediate liabilities over the next twelve months. WGO’s debt-to-equity ratio is 0.69 versus a D/E of 0.53 for REVG. WGO is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

WGO trades at a forward P/E of 12.80, a P/B of 2.64, and a P/S of 0.81, compared to a forward P/E of 15.06, a P/B of 2.89, and a P/S of 0.75 for REVG. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. WGO is currently priced at a -8.89% to its one-year price target of $38.25. Comparatively, REVG is -23.85% relative to its price target of $31.83. This suggests that REVG is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 1.80 for WGO and 1.90 for REVG, which implies that analysts are more bullish on the outlook for REVG.

Risk and Volatility

No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. WGO has a beta of 1.99.

Insider Activity and Investor Sentiment

Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. WGO has a short ratio of 6.05 compared to a short interest of 6.31 for REVG. This implies that the market is currently less bearish on the outlook for WGO.

Summary

Winnebago Industries, Inc. (NYSE:WGO) beats REV Group, Inc. (NYSE:REVG) on a total of 8 of the 13 factors compared between the two stocks. WGO is more profitable, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, WGO is the cheaper of the two stocks on an earnings and book value, Finally, WGO has better sentiment signals based on short interest.

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