Agora Financial’s Rude Awakening

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Baltimore, Maryland

• RV’s hit the skids: How record oil is putting the brakes on this season’s wanderlust,
• One company teetering on the brink of bankruptcy…and how to play it,
• A Wall Street darling’s embarrassing secret, send in the doom and more…

Eric Fry, reporting from Laguna Beach, California…

The summer driving season has arrived, but many Winnebagos will never leave the driveway. The soaring price of gasoline will force RV owners to curtail their gas-guzzling wanderlust.

“I never would have bought [my motor home] if I thought that gas would go this high,” a retired firefighter in Westchester County told the Hudson Valley’s Journal News. “My wife always wanted to go to Napa Valley,” the firefighter lamented. “But with gas so high, it probably would be cheaper to fly and rent a car, rather than take the motor home.”

The firefighter is probably right. We did the math:

Assuming gas mileage of 10 miles to the gallon, a 31-foot motor home would consume about $2,500 worth of gasoline to journey from the Hudson Valley to the Napa Valley, and back again. By comparison, two roundtrip plane tickets from JFK to San Francisco would run about $375 each. Even after paying another $450 to rent a midsized car for a week, the fly/drive combo would only cost about $1,200 – or less than half the cost of the RV’s gas.

Of course, the fly/drive vacation would also incur the costs of staying in hotels. So after all is said and done, the direct cash costs of these two vacation options would be very similar, assuming you ignored the tens of thousands of dollars one must pay to buy an RV in the first place and the thousands of dollars one must pay to insure and maintain the thing.

Non-owners of RVs are probably making similar calculations, which is probably why RV sales are plummeting.

According to a forecast by the University of Michigan Survey Research Center, wholesale shipments of RVs will slump about 14 percent this year to 304,700 units – down from 353,000 units last year and about 390,000 units during that delightful “cheap gas” year of 2006.

Not surprisingly, the Hudson News reports, “the slowdown is having a large impact on the profits of major RV manufacturers such as Winnebago Industries Inc., the industry giant based in Forest City, Iowa. Revenue for Winnebago’s fiscal second quarter fell 17.5 percent to $164.2 million. Net income plummeted 66.6 percent to $2.5 million. In response to weaker orders, Winnebago cut 300 jobs, or 9 percent of its work force, through layoffs and attrition.

“The weak RV market also is taking a toll on industry suppliers that include Drew Industries Inc. of White Plains. Drew, which supplies windows, doors, chassis and other components for RVs,” the Hudson News continues. “Drew has closed 20 of its 51 factories in the past 18 months and laid off 130 salaried workers and more than 200 hourly workers.”

But Drew is not alone. Fleetwood Enterprises, a leading motor-home manufacturer, is also boarding up factories at a rapid clip.

“Last year, we closed half our plants. We somewhat underestimated the magnitude of the decline in sales,” Fleetwood’s CEO recently admitted. “Our dealers tell us, however, that sales of new, improved models have been hampered by existing inventory of older product, and we are working with them
on moving these aged units.”

Good luck!

Aged units, virginal units, neither one is selling. Business is bleak, as the downward sloping price trend of Winnebago’s share price testifies. Curiously, the share price of Fleetwood has barley budged during the last few months. At least not yet.

But in the column below, Dan Amoss explains why Fleetwood might be heading toward a ditch…

—- Dan Amoss’ Strategic Short Report —-

The “Shameful Secret” That Could Triple Your Money…

“By June 16, One of Wall Street’s Fat Cat Financial Firms Could Be Forced by Law to Reveal Embarrassing Data…

That Could Make You up to Three Times Your Money Before the End of 2008…”

They’ve tried to bury it… they’ve tried to “pretty it up”… they may even do it again…but even still, I can show you how you could turn this financial giant’s embarrassing “secret” into a fat, money-tripling gain over the months ahead.

But I have to hear from you by midnight, June 16, or you risk missing out completely… Read the Full Report Here

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The Demise of the RV
By Dan Amoss

For most of the last three decades, oil prices have been low, the economy has been expanding and motor home sales have been soaring. RV sales have been trending up for nearly three decades, but there are many reasons to expect a huge decline in 2008-2009.

That’s why I’ve advised the subscribers of my trading service, the Strategic Short Report, to sell short the weakest company in the RV business. If new RV sales continue to deteriorate, Fleetwood Enterprises (FLE) will probably seek bankruptcy protection before the year is out. This stock is likely headed to zero, when creditors will recover whatever remains.

Fleetwood sells into the rental channel, but it still requires a healthy consumer channel to stay in business. In its latest presentation, Fleetwood claims just 10% market share in Class C motor homes – the ones built on a van platform. This puts it in sixth place, behind Winnebago, Thor, Coachmen, Gulf Stream, and Forest River. This is not good for Fleetwood, since it’s reasonable to expect most motor home shoppers to keep gravitating to the less expensive, more fuel-efficient models.

Fleetwood holds the lead, or 21% market share, in Class A motor homes – the bus-sized gas guzzlers. This is a major handicap in today’s environment. The price points on Fleetwood’s Class A motor homes range from $100,000 to the $280,000 Revolution LE. The Revolution LE looks like a mansion on wheels. Monaco Coach, Winnebago, Thor, and Tiffin round out the field, each with 10-16% market share.

This brings us to Fleetwood’s 10-year financial performance. It’s dreadful, considering how steadily the RV industry has been growing. RV deliveries grew from 293,000 in 1998 to 391,000 in 2006. That’s a 3.7% annual growth rate – hardly a tough industry environment.

However, over the same time frame, Fleetwood’s sales fell at a 2.8% annual rate. Since 1998, its operating profit margins have averaged negative 0.1%. Since Fleetwood can’t make a consistent profit in a growing industry environment, it would be very unlikely to survive a sharp RV industry recession. The odds of another one are good. From 1978-1980, industrywide RV deliveries fell 70%. It can happen again.

The repurchase price is 100% of the principal amount of the debentures plus accrued and unpaid interest. Fleetwood may, at its option, elect to pay the repurchase price in cash, its common stock valued at a 5% discount to its then-current fair market value, or a combination of cash and common stock. Fleetwood has the option to redeem the debentures after Dec. 15, 2008, in whole or in part, for cash, at a price equal to 100% of the principal amount plus accrued and unpaid interest [emphasis added].

This $100 million worth of debt was just reclassified from long- to short-term debt in the nearby chart. In the January quarter, short-term debt jumped by about $1.50 per share (red) and long-term debt fell by about $1.50 per share (turquoise). It clearly would be tough for Fleetwood to come up with $100 million in cash to buy back this debt. If it paid for the debt with stock valued at a 5% discount to the current market price, it would have to issue about 24 million shares, diluting existing shareholders by about 38%. Lenders would hesitate to refinance this debt after taking a good look at the company.

On top of this potentially huge refinancing commitment, Fleetwood owes another $160 million in 6% convertible subordinated debentures. These securities can be converted to FLE shares anytime, but only at the lofty price of $48.72 per share, 10 times the current FLE price. These convertible
securities will not convert, so they should be considered 6% bonds.

Many other creditors are in line ahead of Fleetwood shareholders. They have senior claims on Fleetwood’s assets and consist of suppliers, employees, and customers holding RV warranties. Fleetwood also has a large insurance liability – 88 cents per share – because it self-insures most of the claims that might crop up from workers’ compensation, employee health care, and product liabilities. Finally, if independent RV dealers default on their “floor plan financing” arrangements, Fleetwood may be required to repurchase RVs sitting on dealer lots.

This long list of creditors highlights the skimpiness of equity holders’ claims on Fleetwood assets; book value is just $1 per share and heading down (see light blue in nearby chart). In a December report, Egan-Jones writes:

We would not be surprised by a filing for [bankruptcy] protection within the next couple of quarters. FLE is likely to continue to slip because of increased gasoline costs (thereby restricting revenues and demand for motorized homes), restricted funding (courtesy of the mortgage funding mess), and increased material costs (plastics, steel, and aluminum). None of these problems are likely to abate soon. Recoveries from a bankruptcy will be close to zero for shareholders and nonsecured creditors.

[Joel’s Note: With the economy lurching toward the bog of recession and oil prices piling pressure on the cost side, we reckon Fleetwood won’t be the only company hitting the skids. In fact, Dan’s been tracking one Wall Street darling that could be in for a tough time when some embarrassing financial details float to the surface in a few days. We actually saw this company pop up in yesterday’s Financial Times with that very word, “embarrassing” sitting plumb before its name. You’ll be able to find the company with a little sleuthing, but the real point is that it was in Dan’s short portfolio a long time before it appeared anywhere near the FT front page.

If you’re interested in adding a short strategy to your market approach, Dan’s Strategic Short Report is sure to keep you well ahead of the curve. For his latest report on that Wall Street darling, have a look here.

—- Stock Market Tipping Points Revealed —-

Elite “Market Alliance” Warns…

“Brace Yourself for…The Next 5 Super-Shocks of the COMING STOCK MARKET APOCALYPSE”

“I called every market expert I could think of into the room. We closed the doors. And then we came to only one possible conclusion…”

“Over the next 12 months…and despite all the bank write-downs, market bombs and “bailout” talk already…there are at least FIVE MORE DEVASTATING NEW FINANCIAL SHOCKS ahead.”

“If you do nothing now, you could lose everything in the very near future.”

“Or you could take the seven ‘financial survival’ steps we pounded out that afternoon, all detailed in the new Strategic Financial Survival Library I’d like to send you for free.” Grab Your Report Here

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[Rude Endnote: Is the high oil price the greatest threat to market stability in the months ahead? How bout the financial fiasco that has rocked Wall Street to the core? Or, perhaps it’s political incompetence? We’d like to hear your thoughts on the market’s greatest risk and, if you can see a way out, your ideas on how to play the downward trend to your favor.

Send in your doom and gloom thoughts to the address below. Until tomorrow…

Cheers,

Joel Bowman
Rude Awakening

aussiejoel@the-rude-awakening.com