After being cooped up indoors for months due to an unusually long, hard winter in the U.S., consumers are itching to go outside and play — and that trend bodes well for the right recreation stocks.
As consumer cyclicals, recreation stocks are extremely sensitive to economic shifts because they rely on discretionary spending, unlike non-cyclicals such as food and utilities that people must buy regardless of the state of the economy.
The good news for recreation stocks: consumers are splurging again. A Gallup poll released last week revealed consumers spent an average of $98 a day last month — $10 higher than the April average. The May spending results, which exclude auto and home purchases — as well as monthly bills — were driven higher by a Memorial Day weekend spending spree. Daily consumer spending averaged $134 per day for May 27-29, the highest level since 2008.
The Gallup data reveals the brighter side of the odd impact the bad winter had on consumer spending. The Commerce Department reported a slight decline in consumer spending in April, but it turns out that the 0.1% decline was due to lower heating bills.
So why does this matter to investors? U.S. consumers are opening up their wallets and flashing the plastic again — and after a brutal winter cooped up indoors, they’re more than ready for fun in the sun.
Playing into those trends, here are 3 recreation stocks poised to deliver hot returns this summer:
Recreation Stocks to Buy – Harley-Davidson (HOG)
Harley-Davidson (HOG). The name itself evokes the vision of freedom for road warriors, but this iconic American brand is not content to rest on its laurels.
While HOG still counts on its heavy chrome and Bruce Springsteen cool to connect with its high-performance motorbike audience, the company is beginning to explore its softer side. HOG has launched two new bikes aimed at the growing number of female riders: the Street 500 and Street 750.
Harley Davidson, which has seen sales to women grow by some 30%, is hoping the two new motorcycles will become the motorized version of the little black dress. HOG executives have even named the new bikes — the company’s first new launches in 13 years — “the little black number.” HOG also is doing a good job of growth has recognized the profit potential of international sales.
The valuations for HOG stock aren’t great — price/earnings-to-growth sits at 1.5, and its forward price-to-earnings ratio is a tad over 15. However, you have to pay for growth, and expected five-year average earnings growth of 16% — thanks to the prospects of female-focused motorbikes and the sales opportunity in emerging leisure markets like India and the Middle East — make HOG stock attractive.
Recreation Stocks to Buy – Thor Industries (THO)
THO reported earnings of $1.03 a share last week, 4 cents below analysts’ expectations. Although sales from continuing operations grew by 13% during the quarter, Wall Street expected better there, too. The disappointment was due largely to a need for more production capacity and a tight labor market in Indiana.
However, president and CEO Bob Martin said the company is ramping up capacity at its newest motorized production facility and that the short-term headwinds should begin to dissipate later in the year.
One huge positive for THO stock is the company’s substantial backlog: $820.2 million, up 26% from $649.6 million at the end of April 2013.
Thor Industries also benefits from growth trends in the RV market. In the first quarter of 2014, according to the Recreational Vehicle Industry Association, the RV market continued to surge ahead in the first quarter of 2014 with total RV wholesale shipments reached 89,971 units through March, an increase of 13.3% over the same time frame in 2013.
THO stock is slightly undervalued based on PEG (0.87) and forward P/E (14), and the stock also offers a very modest dividend of 1.5%. But the real bull case here is that as greater production capacity comes online, Thor Industries will be in a stronger position to benefit from consumer spending.
Recreation Stocks to Buy – Winnebago Industries (WGO)
Winnebago Industries (WGO) is another player among the recreation stocks that benefits from the same strong consumer RV sales trends as rival Thor Industries.
Motorhome sales were the biggest driver of earnings growth for Winnebago in the most recent quarter — sales were up nearly 45%. At the same time, WGO was able to deliver gains in gross margins. The unseasonably cold weather in the quarter ended April 30 did contribute to increased expenses, however.
Winnebago, which boasts a strong backload, received an incremental rental order from RV rental company Apollo Motorhome Holidays. The motorhomes will be delivered in the fiscal third quarter, although Winnebago will repurchase up to two-thirds of the units after one season of rental use.
RVs are not the only thing Winnebago is buying back: It repurchased 615,715 shares of WGO stock for nearly $16 million in the most recent quarter … so, even though it doesn’t pay a dividend of any size, Winnebago has shown some focus on putting cash toward shareholder value.
WGO stock trades at 13 times next year’s earnings and a PEG of less than 1, so there’s nothing to complain about — you’re not reaching to buy.
Winnebago looks ready to keep rolling — at least as long as consumers keep spending big money on high-ticket motorhomes.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.