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Monaco Coach Gets Steamrolled On Q4 Outlook

Posted: Nov 07, 2007 09:14 AM by Glenn Curtis

Tickers in this Article: MNC

When I saw that RV maker Monaco Coach (NYSE:MNC) had beat expectations with its third-quarter results, I was surprised and excited. After all, you wouldn't think a company that makes motor homes would be doing well in this market.

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But as I continued to read the company's press release, very quickly the smile on my face turned to a frown. Monaco Coach's Q4 and 2008 forecasts are tantamount to a head-on collision with a train.

Grim Predictions
This quarter's revenue jump came about because Monaco designed new and interesting floor plans for its RVs that very simply inspired folks to go out and buy motor homes.

Getting down to the nitty-gritty, in the period ended September 29, the company reported net income of $3.7 million or 12 cents a share on revenue of $322.4 million. Again, that looked good to me given that in the comparable period last year when the company reported a loss of $7.1 million or 24 cents a share on $292.5 million in revenue. It also piqued my interest given that analysts had been expecting the company to earn just 11 cents a share on $317.7 million in revenue.

However, my excitement was short lived. In conjunction with the press release the company announced that Q4 revenue is expected to come in between $290 and $300 million, and that earnings are expected to be in the range of 2 cents to 4 cents a share. The analyst community had been expecting Monaco to post a profit of about 10 cents a share and generate revenue of roughly $313.7 million.

Monaco Coach said the problems stem from its current backlog, rates of production and the limited number of production days in Q4.

Finally, in 2008 management said that it expects revenue to come in around $1.27 billion to $1.28 billion, which is about what is expected this year. However, it's important to note that this is well short of Wall Street estimates which call for the company to generate about $1.43 billion in sales.

My Take
To be brutally honest, I don't how anyone can be invested in a company that makes motor homes right now. Let's forget about the fact that oil is north of $90 a barrel and the price of gas is nearing $3 a gallon, and let's forget about the fact that consumers are having an increasingly tough time coming up with the cash to insure and maintain these brutes. The real story is their overall cost and the fact that people are having a tough enough time paying their mortgage these days without spending a $200,000 to $300,000 for a home on wheels - even with the fancy new floor plans.

I don't know why the company is even going out on a limb for 2008. From an investor relations standpoint that that's a dumb move. To make predictions so far in advance given the uncertainty of future demand for big-ticket items is a total mistake in my mind. In the weeks ahead I think the analysts who follow the company will be revising their earnings models. This will place pressure on the stock. I also think that tax-loss selling could keep a lid on the shares through the New Year.

The only time I'd even consider buying is if the stock got down to the $7 to $8 level which is roughly the company's book value once the goodwill is subtracted out.

•Calculation: Shareholder Equity $324.45 million - Goodwill $86.4 million = $238.05 million / 30.363 million shares = $7.84
Data Source: Q3 press release.

(To learn more on this calculation, see Digging Into Book Value and Value By The Book.)

Bottom Line
Monaco Coach reported a decent Q3, but its fourth quarter and 2008 outlook and apparent lack of detailed visibility into the future lead me to believe that both the stock should be avoided and that the shares could trade markedly lower over the next couple of months.

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By Glenn Curtis

Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.

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