Real Client Managed Portfolio
Company Name : LCI Industries(NYSE: LCII)
Presentation Date: April 25, 2017
Investment Managers: Danyun (Echo) Wang, Jiayue(Lydia) Li,
Peiyang (Penny) Liu, Zhonghao (Nolan) Zhu
Recommendation: Add to watch list
Company Overview
LCI Industries is a leading supplier of components to the recreational vehicle and residential housing company, which focuses on profitable growth in its industries, both organic and through acquisitions. The company manufactures or distributes a broad array of components for the leading OEM of RVs and adjacent industries. Many of the company’s OEM segment products are also sold through various aftermarket channels. The company has two reportable segments. In 2016, the OEM segment accounts for 92% of consolidated net sales, while the aftermarket segment represents the other 8%. LCI has 41% and 34% penetration in Towable RV and Motorhome respectively and its market shares keep an upward trend in the past 5 years.
Industry Overview
RV shipments and industry revenue have rebounded in the five years to 2017. Rising disposable income boosts consumers' capacity to support big-ticket purchases, such as RVs. Demographic shifts among the baby boomer generation impact RV sales because this population segment is more likely to purchase RVs for leisure. However, Economic and business factors beyond control, including cyclicality and seasonality could lead to fluctuations in operating results. Conditions in the credit market, excess inventories at dealers and manufactures also may limit the development of the RV industry.
Financial Analysis
Although LCI’s customers are mainly car manufacturers, LCI’s products are similar to household furniture. So we picked one furniture company and three auto part companies as comps. LCI collects money quickly but also pays money quickly with stable turnover ratio. LCI started to borrow debt from 2014, and has a lower level of debt than peers. Its profitability is at around comps’ median with a gross margin of 25% and a net profit margin of 8%. As for DuPont analysis, LCI has the highest ROE at 24%. Its advantage lies on interest burden, which is nearly one and asset turnover, which is much higher than others. For Greenblatt ratio, EBIT to EV was stable in the last 5 years, at around 5%. EBIT to tangible asset ratio increased because of the higher growth rate of EBIT.
Valuation
We used comparable analysis and the DCF model to determine LCI’s implied price. We calculated the median of TEV/Sales, TEV/EBITDA, P/E and P/B ratio to do the comparable valuation and the final implied price is $107.5. Our DCF model assumptions are conservative, but we still believe the company have great potentials in the future. We draw the assumptions based on the past 5 years’ 10-k, company annual report and industry report from RVIA. We believe the RV industry will have a modest growth next 5 years and the market shares of the company will keep increasing. We determined the discount rate of 12%. The CAPM Cost of Equity was 8.5% which we weighted at 30% and annualized return of 21.9% accounted for 70%. We use perpetuity approach and permanent growth rate is 3% and we get an implied share price at $87 per share.
Recommendation
We recommend adding LCI into our watch list. Even though LCI has perfect financial conditions, company products, rising industry as well as international and domestic expansion opportunities, it still has risks in dependence on customersand fast acquisition.