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I have followed Thor Industries (NYSE:THO), the RV and bus manufacturer, closely for years, ever since I read about the company in Forbes in 2004, where founder Wade Thompson appeared on the cover with a smiling face. I loved the stock at the beginning of 2009, when I first added it to the the Top 20 Model Portfolio in January at 13.56 and doubled the position later that month below 12. I felt very smart to sell it in April, a month after the market rally began, at 17.55. Of course, it went on to double from there over the next year. I had even highlighted it on Seeking Alpha in September of 2008, laying out the bull case then only to see it drop 50% over the next few months. Ouch!

Well, THO experienced some serious ouch again this week:

THO
The catalyst for the decline was a note in their press release following their 3rd quarter earnings. The company will not be filing its 10-Q on time and may have to restate its previous 10-K and the first three Qs for fiscal 2010 due to concerns of their auditor. For some background, the company has been very public about their use of their substantial capital to support their business with loans to a dealer to support floor inventory as well as with a third-party consumer lender. I am not an accountant, but the issues could result in a revenue restatement with an earnings decline. I don't think that the company did anything wrong in their business but rather in not understanding the proper way to account for these transactions.

Well, this is enough to scare away most investors, as it questions management's financial capability and the validity of the current earnings, but there is more to the story in my opinion. When founder Wade Thompson passed away late last year, the company, which had resisted using its massive cash hoard to repurchase stock when it was at 10, decided to buy back some of his substantial holdings in a very rushed manner, paying 29 for almost 4mm shares. I can tell it was in great haste, as it occurred just 5 weeks after Thompson's passing. They also issued an erroneous press release initially describing the transaction (misstated the percentage of the company).

Another concern I have is how much they had to pay Ron Fenech to step up and run the RV division. These details were determined 4 months after his appointment. I note also the nepotism that continues within the company, with the bus division being run by Thompson's son-in-law, Dicky Riegel. While I had respected the large insider ownership at THO, I get the feeling now that there is a sense of entitlement among key employees given the issues regarding the share repurchase (now underwater) and the management structure (with Peter Orthwein stepping up to be CEO, but is he really acting as CEO?).

THO has certainly turned its business around substantially, restatement or not. Looking out, though, I question the sustainablity in the RV market. This was about a collapse in the market, the elimination of some competitors and then a recovery, not a new long-term up-cycle. The world changed in 2008, and this will be a very hard trend to resurrect due to continuing tight credit, stubbornly high gasoline prices and longer time before retirement. THO is very expensive compared to a plethora of small-cap manufacturers, trading at 3X tangible book. If you like the industry, you can look at Drew Industries (NYSE:DW), a key supplier, but I would advocate investigating any number of other industrials that trade closer to asset value and not as far along in their earnings recovery.

Disclosure: No position

Source: Thor Industries: More Than Just Accounting Concerns Signal Caution