Thor Industries - Great Company, Yet Unfortunately, It Operates In A Cyclical Industry

Jun. 8.14 | About: Thor Industries, (THO)


Thor Industries is in a luxury position; it is actually capacity constrained.

The company has a history of profitable growth, even in the downturns.

Thor is very well-led, yet the cyclical nature of the industry and premium valuation prevents me from stepping in at current levels.

Thor Industries (NYSE:THO) reported a solid set of third quarter results which triggered a modest correction in its share price after analysts were hoping for even more.

The company is actually capacity constrained at the moment, as the backlog increase outpaces topline revenue growth. While the company is very well-managed, Thor continues to operate in a cyclical industry which prevents me from paying an above-market valuation multiple at current levels.

Third Quarter Highlights

Thor reported third quarter revenues which came in at $1.05 billion, thereby increasing 13% from last year's results.

Net earnings grew at the same pace to $55.1 million. Note that last year's earnings were aided by gains from discontinued operations. Adjusting for that, earnings were actually up by 26%.

On a per share basis, earnings rose by 12% to $1.03 per share. This came as a disappointment to analysts which were looking for earnings of $1.07 per share.

Looking Into The Quarter

Thor was actually facing luxury problems again coming out of the cold winter as it faced production capacity challenges. As such, it is expanding operations in its Elkhart facility. This will, however, result in short-term costs and inefficiencies.

The company's large towable RV business reported sales which were up by 8% to $742.4 million. Income before tax rose by a healthy 16% to $72.6 million.

The spectacular growth came from the smaller motorized RV business, which saw its sales increase by 31% to $246.1 million. Start-up costs related to the increase in capacity severely limited earnings growth. Operating earnings were up by just 17% to $17.7 million.

Production challenges, labor shortages and lack of transportation capacity has limited growth at the moment. This is added to the backlog, which increased by 26% to $820.2 million.

The company managed to boost gross margins by 20 basis points to 13.6% of sales. Further operating gains were achieved after the company lowered selling, general and administrative expenses by 30 basis points to just 5.4% of sales.

Valuing Thor

Thor ended the quarter with $121 million in cash and equivalents. The company does not have any debt outstanding, resulting in a comfortable financial position.

Trading at $58 per share, equity in the business is valued at $3.1 billion, which values operating assets at about $3.0 billion.

Based on the results so far this year, revenues could come in around $3.4 billion for the entire year, as earnings could be seen around $160 million. This values operating assets at just 0.9 times annual revenues and roughly 18-19 times GAAP earnings.

The company's quarterly dividend of $0.43 per share provides investors with a 1.6% yield.

Impressive Company, Solid Growth

Thor owns a collection of subsidiaries which combined make it the largest manufacturer of recreational vehicles in the world. The decentralized organizational structure give the company a great deal of flexibility.

The company is number one in the overall recreational vehicle market. It is furthermore number one in fifth wheels and motorhomes with impressive market shares.

For those of you not familiar with the company, I would urge you to take a look at the recent presentation. The company employs some 8,300 workers across 107 facilities, yet it only employs 40 in corporate staff. The company furthermore does not even report adjusted or non-GAAP earnings, fundamentally disagreeing with the practice of ¨adjusting¨earnings.

In the meantime, the company continues to optimize its business by selling its bus business for $105 million in the summer of last year. This was followed by numerous smaller acquisitions for its RV business. In April, Thor acquired RV manufacturer K-Z in a $53 million deal which will add roughly $150 million in sales and be accretive to earnings this year.

Takeaway For Investors

Thor is a well-led company operating in a highly cyclical discretionary industry. Over the past decade, it has grown its revenues at a 4%-5% rate per annum, yet year-over-year swings in revenues have been very high. During the recession, Thor posted a greater than 40% decline in its revenues from 2008 to 2009.

Although the company's profit margins are relatively thin, with gross margins in the mid-teens, the company has managed to be profitable even in these downturns, which is very promising.

So far, we have discussed the good news. The company is trading at multiples which are a bit steep, trading at a modest premium compared to the wider market while operating in a cyclical industry. As recent as the second half of 2011, shares were still trading around $20 per share. Ever since, shares have tripled to recent highs of $65.

While the company is making great moves, it simply cannot avoid the cyclicality of the industry, which is a reason why I don't want to pay a premium price. A 15 times earnings, the multiple seems fair in my opinion, given the strong brands and corporate philosophy which puts my target at $45-$50 per share.

Good luck out there.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.