Recreational vehicles keep driving forward

These lesiure picks have been top performers in the last 5 years.

By InvestorPlace Dec 21, 2012 12:47PM

Dirt Bike Race copyright Digital Vision., Digital Vision, Getty ImagesiplogoBy Will Ashworth

If I told you that the recreational vehicle industry has been one of the most consistent in terms of stock performance over the last five years ... well ... you would probably tell me I'm crazy. There's no way that a bunch of companies selling toys -- and expensive ones at that -- did that well during a period of economic malaise, you must be thinking.

Well, think again.

According to Morningstar, the recreational vehicle industry achieved an annualized total return of over 8% over the past five years -- 602 basis points higher than the S&P 500. In fact, the stocks performed in the top quintile over the last five-year, three-year, one-year and year-to-date periods.

Plus, an improving economy should keep the party going for some time. With that in mind, let's take a look at four companies leading the charge:

Polaris Industries (PII): If you love the outdoors, you're probably familiar with this Minnesota-based company. It makes snowmobiles and ATVs under the Polaris brand as well as motorcycles under the Victory and Indian brands. Although it got its start in snow machines, off-road vehicles accounted for 69% of its $2.7 billion in 2011 revenue. Plus, Victory motorcycles are making an ever-increasing contribution to overall revenues. In North America, Victory's retail sales are up 20% year-to-date.

Polaris has been showing nice growth in international and overall revenues. Already, 30% of its sales come from outside the U.S. And in 2012, the company expects revenues to increase by at least 19%. The best part about the growth, though, is that margins are rising in tandem with revenues, making for significant earnings growth.

Polaris' long-term goal (2018) is to have net margins of at least 10% and revenues of $5 billion -- and it's virtually there already. The company looks set to hit its net margin goal in 2013 and revenues by the end of 2016.  All of this good news has its stock up 50% year-to-date and just under 30% annually over the past five years. I'd have no problem owning Polaris long-term.

Arctic Cat (ACAT): While this pick is considerably smaller than Polaris (about one-fifth the annual revenue), its brand is well-respected in the recreational vehicles industry -- and it boasts a much more balanced revenue stream. While its snowmobile business in the U.S. suffered greatly during the recession, the company is working hard to get back to pre-recession numbers. And despite the struggles, Arctic Cat still controls 23% of the North American market -- around the same a larger rival Polaris.

On the ATV side in North America, it has just 7.5% market share. That, of course, leaves real opportunity for it to grow ... especially with the introduction of its side-by-side product line. The Wildcalt 4 100Wildcat 4here  1000 (see here on company website)  com looks like a really fun ride.

Plus, the stock's performance over the past five years is almost as spectacular -- up nearly 25% on an annualized basis. Plus, its recovery since the recession has been even more pronounced. At market lows in March 2009, it was trading below $3. In the past year, the stock has climbed just under 50%, testing the $45-mark twice in 2012.

Both times it dropped back to the $35-$40 level. On a valuation basis, Arctic Cat is a much better buy than Polaris.

Thor Industries (THO): These next two picks haven't done nearly as well over the past five years, but they're coming on strong. Thor generates nearly three-quarters of its $3.1 billion in annual revenue from trailers, with the remainder split almost evenly between motorhomes and commercial vehicles.

Given the rough ride the economy's had, it's amazing that Thor is even around -- let alone growing. In fiscal 2012, revenues grew 12% and its earnings weren't far behind at 18% growth that put income back at pre-recession levels. While its margins are a little lower than back then, they're improving with every passing quarter. Thor also announced Dec. 12 that it will pay a special dividend of $1.50 to shareholders of record as of tomorrow -- and that it will pay its January quarterly dividend of 18 cents in December as well.

Winnebago Industries (WGO): Winnebago's stock jumped in a big way Thursday morning on news of good first quarter earnings and strong demand. Winnebago's business is the exact opposite of Thor's, as 83% of its revenues come from motorhomes. Its numbers have been just as strong, though.

In the first quarter ending Dec. 1, its operating income of $9.9 million was $400,000 higher than in all of 2012. Revenues grew 47% year-over-year to $194 million with the biggest growth coming from its Class A gas-powered motorhomes, which saw unit sales increase almost 63% year-over-year. Year-to-date, the stock has more than doubled. Still, of the four stocks, this is the one that seems to have the most upside.

Bottom Line: I like all four stocks heading into 2013. If you're looking for upside potential, Arctic Cat and Winnebago are your best bets. If stable mid-caps are your preference, Polaris and Thor make more sense. All in all, though, the sector's had its foot on the gas -- even in rough times. These companies definitely deserve a test-drive.

As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.

More from InvestorPlace

Dec 22, 2012 3:09PM
Farmers, ranchers and retirees use them for herding, hunting and trail riding and you got to have a toy hauler or truck to go with 2-3 of them. Not everybody got had with a 4000sft, $600k boat anchor.
Dec 24, 2012 11:16AM
Thank you for using Vintage MX photo...we have thiving vintage MX club in AZ !!
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