RV makers rolling again-but where are they headed?

By James B. Kelleher - Analysis

CHICAGO (Reuters) - U.S. motorhome manufacturers have seen demand for their pricey, gas-guzzling vehicles evaporate as a result of the current economic downturn and related credit crunch. No one is quite sure what the market for their products will look once consumers start spending again.

So why is Wall Street so upbeat about the sector?

RV manufacturers expect to ship just 14,100 motorhomes this year -- the industry's worst showing in the 38 years data has been collected. That is down 50 percent from the 28,300 motorhomes the industry shipped last year and down 80 percent from the 71,800 vehicles it shipped in 2004.

To put that in perspective, the U.S. auto industry -- the poster child for a business in distress -- expects total vehicle sales in 2009 to be down 30 percent from last year and down less than 50 percent from their peak at the start of this decade.

Yet while automaker shares remain radioactive, analysts remain remarkably sanguine about Winnebago Industries Inc (WGO.N) and Thor Industries Inc (THO.N), the two biggest players in the RV business.

They argue that the market for motorhomes will come back and that the two companies will enjoy much bigger market share -- and all the advantages that come with it.

Investors seem to agree. After collapsing along with the broader market after the fall of Lehman Brothers last September, shares of both companies have staged big rallies over the past two months, more than doubling in value and handily outperforming the S&P 500 .SPX.

FAST-FORWARD

But to justify the rosy outlook, investors and analysts seem to be fast-forwarding to some presumed rebound in demand that will take place once the current downturn passes, rather than focusing on the industry's immediate challenges.

"Dealers report a troublesome environment, with light traffic, weak demand, tight credit and uncertain supply -- but few things last forever," said Craig Kennison, an analyst at Robert W. Baird.

"Consumer confidence has bounced and retail comps are easy -- suggesting the potential for a mild recovery."

How ugly is the current environment? Half a dozen leading motorhome manufacturers and suppliers, including Fleetwood Enterprises Inc FLTWQ.OB and Monaco Coach Corp (MCOAQ.PK), have been forced into bankruptcy over the past year.

The handful of companies still standing face a bleak future, in which they are likely to rack up losses for quarters to come because of low capacity utilization in their factories and aggressive discounting in showrooms.

"I think you're going to see huge discounts," Bob Olson, Winnebago's chief executive and president, warned during the company's last earnings call.

"If you're in the motorhome buying market right now, you're probably going to see some deals that you'll never see again."