A Winnebago Moment?

Ever hear a star athlete – think Federer – refer to being “in the moment.” A mysterious mental state of calmness, clarity and conviction. Unless you’ve been there before, it might sound like a lot of hocus-pocus. But when you watch them perform, again and again – in that moment, at that almost superhuman, Zen-like level of play – the Federers of the world can smash our notions of what’s possible.

It’s not possible to sniff out “the moment” like it’s a cookie baking in the oven. It’s not possible to force it to happen, or even beat it into submission.

But when it happens, anything’s possible.

Now turn to the world of investing. Everyone is searching for an edge. Anywhere, even for just a nanosecond. Through speed, discovery, scale, cleverness, or simple brute force (yes, bullies often prosper). Or with good old-fashioned wealth, power and influence.

But one could argue that the power of recognizing and harnessing the moment – and the discipline to avoid other temptations – is superior to any of these other advantages when grounded in careful fundamental analysis. In fact, it’s an unbeatable pathway to success, regardless of strategy, asset class or market cycle. And it absolutely confounds the competition.

In the moment, it’s possible to turn a losing tennis game around. In the moment, it’s possible to find opportunity in chaos – to put the pieces of a scattered puzzle together to form a meaningful mosaic. To crystallize the future.

How can you tell if you’re in the moment? Simple. You’ll know when you’re there. Otherwise, you’re not. Just be ready to take action when you are. A good friend often said his definition of luck was the intersection of preparation and opportunity. He was always prepared, patiently awaiting the moment to pounce.

Here’s an example of a recent moment when everything came together:

All alone in the little-known town of Forest City, Iowa, sits one of the world’s most iconic brands – Winnebago. Inarguably a household name (see, I haven’t even told you what the company does). A rock-solid balance sheet. Spot-on product innovation for decades. A winning culture. Solid bench strength and governance. Durable distribution channels. Cash flows on the rise. A clear leader in a growth market (the cycle is nowhere close to topping). Favorable demographics and secular trends. But its stock is down 12% this year, and way off its 52-week high. Now trading at 7.2x cash flow and 2.5x tangible book value (46% and 24% below the respective 10-year averages). And getting cheaper thus more interesting every day.

But then you notice some faint discolorations. The company has exhausted the Forest City labor pool just to keep up with current production, much less grow faster than the industry. And it’s a hard place to attract new workers. The company’s leadership has always risen from within, and had a good track record with it. But on August 6, CEO Randy Potts suddenly retired. Why? Bob Olson (the former CEO) stepped back in (out of retirement) to serve as interim CEO until a permanent replacement could be found. Winnebago clearly has internal talent that could rise to the occasion. Then in early September, Olson announced he would step down as of the 24th, regardless of whether a new CEO had been announced. So what’s really happening out there? Why the rapid changes? Where is this heading?

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Pick your flavor, like ordering a scoop at Baskin Robbins. Major fundamental issues? Highly unlikely. Internal discord? Doubtful. Dissension between the Board and CEO over strategy? Possibly with Potts, far less likely with Olson. Misfiring on crucial acquisition opportunities? Or, more likely, maybe the company is firing on all cylinders, Olson’s tour has served its purpose and all that’s required is a little patience. And so on.

Until you have a moment – see it from a different angle – and a mosaic comes into focus:

Winnebago is arguably an underutilized asset – the company can’t really grow without access to more resources (labor). And because it’s in the middle of Iowa and cannot grow, it’s really hard to attract a seasoned CEO from the outside. Granted, an internal candidate could surface, but that seems less likely with each passing day. And a strategic shift appears necessary – most of the natural skilled resources are over in places like Elkhart, Indiana, or down in Alabama. So, the company appears to be stuck, at least temporarily.

Then imagine this conundrum triggers the board (very good, smart folks) to review broader “strategic alternatives.” And in due course, some equally smart PE (private equity) firm takes a look and thinks it sees a new winning strategy for the company. The PE firm has their own “moment,” which goes something like this:

Buy an iconic brand at a reasonable price. Put in a turnaround CEO (possibly a former McKinsey star) to outsource production, tighten up overhead and get the growth engine ginned back up. Set the stage to “unlock the value,” one might say. The PE firm could see a clear pathway to double cash flow over the next 3-5 years, and then flip it to a strategic (Berkshire, Thor, Ford, or so on) at maybe a 50% higher multiple? Simple. Just attract a growth multiple to an iconic brand. That means the PE firm could buy it for $100 (in normalized terms) and sell it for a 3x return ($300/$100) in a few years. Not too shabby. We should all be so lucky.

Then the PE firm sees even more potential – zero debt and solid cash flow, which looks great to banks with money to lend. So the PE firm can juice the returns by levering up the investment. Assume half of the initial $100 is borrowed. In simple terms, the expected return goes from 3x to 5x ($250/$50). Still a $200 gain, but on half the invested capital. Granted, this is simple math, but it’s always “better to be generally right than specifically wrong.”

At this stage, the PE firm could be all lathered up. Hubris might have snuck in. The only issue would be price. Care to wager a guess? $28/share?

Then again, it’s just a mosaic, something from a moment of clarity. Or a mirage, maybe from too much creative thinking. Take your pick. Time will tell.

Regardless of the mosaic, the clarity of the moment is undeniable. A great American brand on firm footing in a growth market. Strong management, just momentarily lacking a visionary leader in the top role. And trading at under $20/share, Winnebago is a bargain for investors, a PE firm or strategic acquirer. Unless, however, one’s frontal lobe has been skewered by fears of China’s slowing economy, the U.S. rate environment, the recent VW diesel scandal, or a host of other issues, which are real, but highly unlikely to deter Winnebago’s progress. The downside appears limited, and the upside potential is north of $30 over the next couple of years.

We look forward to seeing how the future unfolds.

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