This RV manufacturer beat analysts’ earnings estimates by $0.27 last quarter. The company will announce its fiscal first quarter earnings on December 9. Analysts expect EPS of $1.22. The shares have a current annual dividend yield of 2.43%, paid quarterly.
Thor Industries, Inc. (THO)
From The Turnaround Letter
Thor Industries, Inc. (THO) is the world’s largest manufacturer of recreational vehicles, including motor homes, trailers and accessories. Founded in 1980 when two entrepreneurs acquired then-struggling Airstream from Beatrice Foods, the company quickly recovered under the new ownership and completed an initial public offering in 1984. Following decades of acquisition-driven and organic growth, the company now holds a 45% market share in North America. This past February, Thor completed its first acquisition outside of North America, with the $1.9 billion purchase of Germany-based Erwin Hymer Group, one of Europe’s largest RV manufacturers. Conservative and well-managed, Thor Industries is one of the few remaining companies that reports only GAAP-based earnings.
For nearly a decade, the North American RV industry boomed, driven by the strong economy, growing demand from baby boomers and emerging interest from a younger population who developed a taste for the outdoors. Industry sales reached over 500,000 units by 2017, three times the 2009 recessionary lows. Thor shares surged as well, reaching $157 by January 2018 as growth investors chased the company’s rising sales and expanding margins.
However, optimism toward the RV market has turned to worry over a possible recession, weakening end-market demand and excess industry inventory from over-production. Investors also worry about Thor’s EHG acquisition. It is outside of the company’s familiar North American market, added over $2 billion in new debt and exposes the company to Brexit and the vagaries of a slowing European economy. THO shares plummeted by over 70%, touching $43 this past August. Despite a recent rebound in Thor’s shares since August, investors remain highly skeptical about the company’s prospects.
Unlike many companies that grow through acquisitions, Thor has preserved its sturdy balance sheet and margins. Prior to the EHG acquisition, Thor was debt-free and had essentially no increase in its share-count in eight years despite several acquisitions. Similarly, its pre-tax profit margin increased to 7.7% by fiscal 2017, among the highest in a decade, just before the weaker fiscal 2018 and fiscal 2019 results. Half a year after the EHG acquisition, Thor has already paid down $480 million of its debt. We think the company could repay the entire debt balance in as little as three years.
Thor is highly focused on a successful integration. The two companies seem quite compatible, and EHG’s founding family is retaining $144 million in THO shares in a sign of confidence in a post-merger Thor.
The North American economy remains remarkably resilient, providing a supportive environment, while conditions in Europe appear stable. North American dealer inventories have been shrinking dramatically and the current glut appears likely to be gone by January, while European dealer inventories appear matched to customer demand. Despite this and other near-term headwinds including Brexit and tariffs, the secular growth outlook is healthy.
Even in weaker conditions, Thor’s highly variable cost structure allows it to defend its margins. In the most recent quarter, its North American gross margins expanded by 1.8 percentage points even as sales fell 15% due to dealer inventory rebalancing. Also, new product innovations help preserve the company’s profits and relevancy.
Valuation is attractive at 7.5x expected FY2020 EBITDA. Thor’s modest dividend yield seems secure, particularly as the company raised it on October 11th.
The beaten down share price gives investors an attractive entry point into a well-managed company that is likely to generate considerable value over the next several years.
We recommend the PURCHASE of shares of Thor Industries (THO) with a $98 price target.
George Putnam III, The Turnaround Letter, www.turnaroundletter.com, 617-573-9550, November 2019