INVESTMENT THESIS
Our rating on Thor Industries Inc. (NYSE: THO) is BUY, with a target price of $125. The company has been profitable every year since its inception in 1980 and has a long history of returning cash to shareholders through dividends and share repurchases. From a technical standpoint, the shares have plateaued following a period of higher highs and higher lows that dates to March 2020.
RECENT DEVELOPMENTS
Over the past three months, THO shares have underperformed the market, falling 22%, versus an 8% gain for the S&P 500. Over the past year, they have outperformed the broader market, gaining 40% compared to a gain of 16% for the index. Over the past five years, they have outperformed the industry group (ETF is IYK). The beta on THO is a high 2.4.
Thor recently reported results that topped expectations. For fiscal 1Q21 (ended October 31, 2020), the company reported earnings of $2.05 per diluted share, up from $0.92 per share a year earlier and above our forecast of $1.48. The 1Q21 gross margin rose to 14.9% from 14.3% a year earlier. Revenue rose to $2.54 billion from $2.16 billion in 1Q21.
While management did not provide an updated outlook for FY21, it said that it agreed with the RV Industry Association’s forecast, which calls for an 18.7% year-over-year increase in RV shipments in calendar 2021. CEO Robert Martin projected continued growth for Thor in FY21 despite supply-chain constraints related to the pandemic.
EARNINGS & GROWTH ANALYSIS
The company has three segments: North American Towable RV (55% of total revenue), North American Motorized RVs (19.5%), European RVs (24%).
In fiscal 1Q, North American Towable RV net sales were $1.39 billion, up from $1.20 billion in the prior-year period, while motorized RV sales rose 18.7% to $493.9 million. The European RV segment reported sales of $602.5 million, up 22.2%.
As of the end of October 2020, the backlog for towable RVs was up 312% from the prior year, to $4.4 billion, and the backlog for motorized RVs was up 230%, to $1.55 billion. The European RV backlog was $1.02 billion, up 78%.
Management keeps a close eye on costs. The North American Towable and Motorized divisions both reported higher margins in 1Q.
Turning to our estimates, and based on current sales, margin and backlog trends, we are raising our FY21 EPS forecast to $7.03 from $6.80. Our estimate implies growth of more than 69% this year. We look for growth to continue in FY22 and are increasing our EPS estimate to $7.67 from $7.30.
FINANCIAL STRENGTH & DIVIDEND
Our financial strength rating on Thor is Medium-Low. The company is rated B1/stable, up from B1/negative, by Moody’s, and BB-/positive, up from BB-/negative by Standard & Poor’s.
The company had $337.4 million in cash and cash equivalents at the end of fiscal 1Q21. It also had $1.7 billion in total debt, representing 41% of total capitalization.
Thor pays a dividend. In October 2020, it raised its quarterly payout by 2.5% to $0.41 per share, or $1.64 annually, for a yield of about 1.7%. Our dividend estimates are $1.64 for FY21 and $1.68 for FY22.
The company also has a stock buyback program, although share repurchases are a low priority in the company’s capital allocation program.
MANAGEMENT & RISKS
The CEO and president of Thor is Robert Martin. He has been in the role since 2013 and has been with the Thor since 2001, when the company acquired Keystone RV. Colleen Zuhl has served as CFO since 2013.
We like the company’s financial discipline, which stresses positive cash flow generation in all divisions and in all economic environments. The company has been profitable every year since its inception in 1980 and has a long history of returning cash to shareholders through dividends and share repurchases. The company has also grown through acquisitions, including its purchase of Erwin Hymer Group (EHG), one of Europe’s largest makers of recreational vehicles, in 2019. The acquisitions are consistent with Thor’s long-term strategy of rolling up industry competitors and increasing efficiency at acquired operations.
Investors in THO shares face risks. The company faces supply-chain risks from the pandemic, though it is also seeing increased demand for RVs, which give consumers the ability to take socially distanced vacations in a controlled environment.
We believe that long-term demographics favor the purchase of motor coaches as baby boomers retire (the number of consumers aged 55-74 will reach 79 million by 2025, an increase of 15% from 2015) and more millennials decide to camp on vacations. Management also notes that long-term owners typically trade in their RV for a new model every 3-5 years. On the negative side, the industry has been impacted by the discretionary nature of its products, and could be hurt by a return to high gas prices.
The RV industry is both seasonal and cyclical, leading to fluctuations in sales, production, and net income for the business. Since vacationers and campers are the primary consumers of recreational vehicles, demand generally declines during the fall and winter months. Dealer demand, buying patterns, and severe weather can also impact the timing of shipments from quarter to quarter. There may also be substantial annual fluctuations in production and shipment levels.
The RV industry is highly competitive, with low barriers to entry. While Thor benefits from its position as the largest RV manufacturer, it relies heavily on its largest dealer, FreedomRoads LLC, which accounted for 18.5% of consolidated net sales in FY19. In recent years, FreedomRoads has acquired a number of RV dealerships. This has further concentrated Thor’s sales and increased its business risk from the FreedomRoads relationship.
Thor’s increased debt, stemming from the EHG acquisition, makes it more sensitive to the effects of an economic downturn. In addition, although international expansion represents a significant growth opportunity, currency fluctuations and economic weakness in foreign markets can weigh on quarterly results.
COMPANY DESCRIPTION
Thor is the world’s largest manufacturer of recreational vehicles, with leading positions in Motorized and Towable RVs (Travel Trailers and Fifth Wheels). The company has been profitable every year since its inception in 1980. Thor manufactures a wide variety of RVs in the U.S. and Europe and sells those vehicles and parts to independent, nonfranchise dealers throughout the U.S., Canada and Europe. The company has more than 22,000 employees.
VALUATION
THO shares have traded between $32 and $121 over the past 52 weeks and are currently in the upper half of this range. From a technical standpoint, the shares have plateaued following a period of higher highs and higher lows that dates to March 2020. We see resistance in the $111-$113 range.
From a fundamental standpoint, the shares are trading at a projected FY22 P/E of 12, in the lower half of the historical range of 9-17. The price/sales multiple is 0.6, below the midpoint of the historical range of 0.4-0.9. Our target price of $125 implies an FY22 multiple of 16, near the high end of the historical range.
On December 16, BUY-rated THO closed at $93.03, down $4.30
Source: Argus
