Barron's - USA (2021-11-22)

November 22, 2021 BARRON’S 27

B

ottlenecks and supply shortages have caused

major problems forLCI Industries,which

makes parts for recreational vehicles and

boats. Those problems are starting to ease—

and that could be the catalyst for a higher

stock price.

Shortages and supply-chain snarls have

hit many manufacturing companies, particularly small

ones, where it hurts—their profit margins. The median

operating margins for the S&P 600 small-capitalization

stock index decreased to 8.9% in the third quarter, down

from 10% in the second.

LCI Industries (ticker: LCII) saw its own margin drop

from 8.6% to 7.6%. But those supply-chain problems are

easing—and LCI, whose brands include Taylor Made

boat parts and Thomas Payne RV furniture, is a prime

beneficiary.

Management has taken steps aimed at ensuring that

margins recover, by continuing to shift its focus from

selling parts to RV and boat manufacturers to the more

profitable aftermarket business—selling replacement

parts.

As a result, the company, which has a stock market

capitalization of $4 billion, could return to previous lev-

els of profitability. That could push the stock, which

closed at a record $156.91 on Friday, to new highs.

It’s difficult to overstate just how much LCI, also

known as Lippert, has been hurt by the shortages. Rising

input costs shaved about five percentage points off its

gross margin, which fell to 21.6% during the just-ended

third quarter, from 26.8% in the same 2020 period.

total sales in 2018. In 2020, the num-

ber jumped to 22.5%, and it should

only get larger.

Sales of new boats and RVs surged

in the pandemic, and a slowdown in

the company’s original equipment

business could hurt the stock.

At the same time, all of those new

vehicles will need replacement parts.

“We’re entering a period where

you’regoingtohavemorethings

break down and need to be re-

placed,” says Daniel Moore, an ana-

lyst at CJS Securities. “You should

see really good [aftermarket] growth.

While a fifth of the company’s

business currently comes from the

aftermarket, LCI’s chief financial

officer, Brian Hall, wants to increase

the replacement parts’ share of sales

to 25% by 2023.

Helping to drive that growth, Hall

says, is that large distributors are

beginning to take over mom-and-pop

parts dealers. Small dealers typically

orderasinglepartuponrequest

from a vehicle owner, but larger dis-

tributors buy different products—

andmoreofthem—tomakethem

available to consumers at any given

moment.

To expand its aftermarket offer-

ings, LCI has been acquiring new

businesses, such as CURT Group, a

trailer-hitch maker it bought for

$340 million in 2019. The operating

margin in LCI’s aftermarket business

hit 11.4% in the third quarter, versus

just 6.8% for the rest of its business.

Lower input costs and the contin-

ued expansion of aftermarket busi-

ness means that LCI’s sales and

earnings could grow faster than cur-

rently predicted. Analysts expect the

company’s sales to grow 9% in 2022,

to $4.8 billion, and earnings to climb

17%, to $12.69 a share.

Still, the Street expects LCI’s earn-

ings to fall to $11.31 a share in 2023—

a number that’s far too low if the

company can hit $5 billion of sales

that year, says Truist Securities ana-

lyst Michael Swartz. With the com-

pany expected to boost margins to

something closer to 9%, earnings

could hit $13 a share or more.

“[We]believetheworstisnow

behind LCI and that we could actu-

ally see upside to margins in coming

quarters,” Swartz says. “We remain

constructive on the [long term] story

and believe sentiment should im-

prove, given the more favorable cost/

price dynamic set to unfold in com-

ing quarters.”

At the current 12.4 times 12-month

estimated earnings—below the five-

year average of 15.2 times—LCI stock

would be worth $161 a share, 2.6%

above Friday’s close. But an increase

to 14 times would make the shares

worth$182,up16%fromFriday’s

close, says CJS Securities’ Moore,

though it may take some patience

before it plays out.

One advantage that LCI has:

Unlike many other small-cap compa-

nies, it pays a dividend, currently

yielding about 2.3%. So, investors

willgetpaidtowait.B

ABoatandRVPartsMaker

With Dual Profit Engines

LCI Industries could be a prime beneficiary of easing supply-chain bottlenecks.

Better yet, it has embarked on a smart expansion into aftermarket parts.

Those problems are starting to

ease, LCI management said during

the company’s third-quarter earnings

call, and it guided fourth-quarter

operating margins up by one to 1.5

percentage points above third-

quarter levels. That’s one reason

LCI stock has rallied 10% since its

Nov. 2 earnings report.

LCI isn’t just counting on lower

materials costs and other supply-

chain problems slowly easing. It has

bet big on the aftermarket, which has

historically been a small part of its

business, accounting for just 9.4% of

LCI Industries

RV- and boat-component manufacturer

Headquarters:Elkhart, Indiana

YTD Change:19%

Market Value(bil):$3.9

2022E Sales(bil):$4.8

2022E Net Income(mil):$328

2022E EPS:$12.69

2022E P/E:12.1

Recent Price:$154.21

Dividend Yield:2.3%

E=estimate.

LCII / NYSE

2019 ’20 ’21

60

80

100

120

140

$160

Source: FactSet

By JACOB SONENSHINE

SIZING UP SMALL-CAPS

Illustration by Alex Fine