After the Fed rate cut, Citigroup says RV stocks will usher in a "buy" opportunity

Intelligent Finance APP noticed that as the United States enters a new period of possible loose monetary policy, some industries will thrive in this new environment of monetary easing, providing buying opportunities for investors. A study by Citigroup shows that the affordability of boats and RVs will not only improve to the level of 2024, but will also provide buying opportunities for stocks in this industry that have been suppressed.

Citigroup analyst James Hardiman said, "While affordability is by no means the only factor affecting demand, we believe investors have underestimated these tailwinds, just as we have underestimated the strengthening tailwinds over the past two years."

During the pandemic, lockdowns, social distancing, and lack of travel options attracted consumers with stimulus funds to purchase RVs and boats. Cheap financing made RVs and boats a more affordable and safer travel option. Industry data shows that shipments reached a peak in 2021, reaching 600,000 units, a 40% increase from the early 21st century. Unlike more car sales determined by vehicle prices, the demand for RVs and boats depends more on the monthly repayment amount.

Unfortunately, the good times will not last, as the Federal Reserve aggressively raises interest rates, making RVs and yachts unaffordable and thrown into the trash heap of post-pandemic entertainment. With 80% of RVs and half of yachts already financed (this number will be even higher with the introduction of new yachts), soaring interest rates have made consumers lose interest in the "home on wheels," leading to a more than 50% drop in shipments within two years.

Manufacturers have lowered prices to maintain a certain level of affordability to offset higher financing rates, but this has hurt profits. Winnebago (WGO.US) saw a 49% drop in profits in the first quarter of 2023, while the largest RV dealer in the United States, LazyDays (GORV.US), saw profits drop by 98.7%. Despite these discounts, retail sales in this segment have fallen to the lowest level since 2015.

Now, it seems that this situation is about to change. Citigroup predicts that the first two rate cuts will be 50 basis points each in September and November, followed by 25 basis points each, until the federal funds target rate reaches 3% to 3.25% by June 2025, with a total of 225 basis points cut over the next 10 months.

Combined with the moderate price increase or even decrease from later this year to next year, it is expected that the total cost of purchasing leisure vehicles as a percentage of disposable income will be lower than at the end of 2023. In addition, lower rates and inflation in 2025 will benefit RVs and yachts the most, bringing the affordability of RVs and yachts to a level comparable to 2022.

Within the scope of Citigroup's research, leisure vehicles are "undoubtedly the biggest beneficiaries of rate cuts," and RVs and yachts are the best way to trade rate cuts or soft landings. Hardiman estimates that by 2025, the affordability of a typical RV will increase, with monthly payments accounting for 12.6% of monthly disposable income, compared to 16% by 2023 For investors, Citigroup believes that Thor Industries (THO.US), Winnebago, Camping World (CWH.US), Brunswick Corp (BC.US), and Marine Max (HZO.US) are the best ways to take advantage of changes in interest rate environment and market declines since last week.

Hardiman stated: "They are undoubtedly the best stocks for a 'soft landing', and their relative attractiveness will only increase after more 'safe haven' withdrawals."

However, the downside is that if the Federal Reserve fails to achieve a soft landing and instead experiences a hard landing, leading to an economic recession and consumers going into hibernation. Even cheaper financing cannot attract financially cautious consumers to pay a six-figure cost for a purely non-essential item.

Hardiman said: "Clearly, leisure demand will be negatively impacted by a deep recession or sustained decline, either of which could lead to a decline in each stock we are concerned about, and the decline may be indistinguishable, as was the case in the past week." He notably mentioned the frequency of "consumer weakness", "cautious consumers", and "soft consumers" mentioned during last week's US stock earnings conference calls (6 times, 33 times, and 22 times respectively).

But if the Federal Reserve succeeds, any rate cuts will benefit consumer confidence, Hardiman added, "As rates continue to decline, people's affordability will further improve by 2025."