Thor Industries (THO) is the leading producer of Recreation vehicles in America. It operates in 3 main segments: towables (fifth wheels and trailers) motorized vehicles (traditional RVs) and buses (airports, hotels). For those markets they have market shares of 39%, 22%, 38% as of September 2011. Their revenue for 2011 was $2.75B and their market cap is currently $1.4B.
Before beginning on the company itself it's worth understanding the RV/towable industry quickly as this accounts for approximately 85% of the company's sales. The industry peaked in around 2006 shipping almost 400,000 units in America and Canada. The industry was in a bubble for the same reasons the housing market was in a bubble and crashed in a similar manner with industry sales falling to 165,000 within 3 years. Earnings collapsed for most companies: EPS for Thor went from $1.67 in 2008 to $0.31 in 2009. However, Thor was lucky as many companies went under leaving the industry with fewer competitors. This has led to gain of market share by the other companies including Thor.
Additionally there are a few other industry wide catalysts. First, RV's remain a very economic alternative for many vacations. As long as this continues, the industry will as well. Second, and more importantly the demographics are favorable for the industry. Currently, the 35-54 year olds own the most RVs; however, the group that owns most RVs as a percentage of the group is the 55-65 year old group. With the baby boomers aging, the 55-65 year old age bracket is expected to increase 45% over the next ten years, as opposed to overall population growth of 8%. The industry has been doing well: volume rebounded almost 50% in 2010, and shipments are currently up 8.6% for 2012 yoy.
Overall, the industry is seeing a major shift in products. People are generally looking for smaller RVs: huge rolling palaces are seeing a major decline while fifth wheels have become much more fashionable. Additionally, buyers are looking for more fuel efficient models whether as an upgrade or as a new vehicle.
These industry shifts overall are a positive for Thor. Towables make over 80% of RV revenue and almost 70% of company revenue. The move to more fuel efficient and smaller units fits with Thor's strategy. Additionally, Thor has been able to capture a larger percentage of the market due to the exit of competitors. Market share in the RV market jumped from 29.4% in 2009 to 38.6% in 2010. It fell to 37.9% in 2011. The company has slightly been losing market share over the past year, as industry shipments have increased slightly more than the company's towable shipments. Their net sales improved at a faster pace as they were also able to increase the price of their offerings. These numbers are deceiving though: they have achieved these higher sales through discounting and more advertising; in particular they do not include the effect of discounting in their net sales. This has resulted in gross profit only growing 4.8% 9 months yoy. They have, however, been able to reduce corporate costs in SG&A allowing them to growth their net income at around 10% yoy.
This leads to the crux of Thor as an investment which I think can be summarized with two questions. Can Thor reduce the compression of gross margin and achieve their net revenue growth through normal means? Additionally, are Thor's products actually better than competitors', allowing them to take future market share? I do not have the answers currently to these questions, as information in this industry is relatively scarce. In my opinion an affirmative to both of these questions would make Thor a definite buy because they would be in a growing industry where they are the dominant force due to size and quality. The lack of information would open the door up for profitable independent research.
The company as mentioned does operate in the bus segment. Buses have grown at 9% yoy (9 months). This is a nice change from the slump witnessed in the area due to the removal of federal funding, as their principal consumers were municipalities. Although buses are important, the driver of this stock remains the RV market.
There are other important features of Thor as an investment. They have 0 debt have almost $200MM in cash as the company likes to operate conservatively. They have increased their dividend 100% over the past 3 years and currently yield 2.14%. They also have retired stock recently; however this has been the result of buying back stock from the estate of a dead founder of the company so I do not see the company continuing buybacks. This has been funded by a strong cash flow of 5.5% for fiscal 2011. I believe this ratio will grow when the company reports fiscal 12. However, getting a prorated FCF yield is extremely difficult because the company historically back loads their cash flow by significantly increasing their working capital in Q3 causing cash flow to go down. I thought this was accounting shenanigans, but the company did this last year at the same time, when you examine the huge growth in receivables and inventory at this time in the cycle. In fact, upon inspection, this situation may be a positive because inventory has declined significantly from the same time as of last year. Along those same lines, the amount of RVs that the company has had to repurchase from dealers in default has dropped to almost 0 (75+% drop) yoy indicating the strength of the industry. Overall, these figures indicate strength and the ability to continue its cash flow.
The company is currently trading at the low end of its P/E range (12.8 to 18.8) at 13.39. This also compares favorably to competitors' valuation ratios which can be summarized as follows.
|P/E Ratio||EV/EBITDA||FCF Yield|
|Drew Industries (DW)||20||9.04||1.99%|
|Winnebago Industries (WGO)||39.8||13.21||NA|
As mentioned, two major risk ideas are compression of gross margin and lack of distinguishing features making it a better product. Right now the company can only say their competitive advantage is size allowing them to produce RVs at a low cost. Yet they still have to discount their models raising question marks about the quality of their products. Another major risk is the cyclicality and volatility of the industry. The industry can rise and fall very quickly and inventory levels are not low. Yes demand is rising, but it is something to keep an eye on because their sales have had a strong negative correlation with inventory levels. Another major risk to the company is rising gas prices. Although RVs may remain an economic alternative, rising gas prices inevitably hit Thor because they're directly related to travel. More people staying home is bad business for Thor.
Honestly, this company is intriguing. I'm neither recommending a buy nor a sell. There are a lot of micro and macro factors going Thor's way. This is in stark contrast to a competitor such as Winnebago which could be a prime short target. Yet in spite of all these strengths, I can not invest in a company that is a) having difficulty achieving pricing power b) doesn't have true competitive advantages and c) there is no evidence of a superior product. The real power in the industry may actually be Forest River which has consistently grown market share over the past 4 years. Unfortunately for the individual investor, this company is owned by Berkshire Hathaway (BRK.A). Honestly, this company appears ripe for a private equity takeover to help improve its efficiency. However, supermajority charter laws and Delaware laws actually make this difficult so this may not happen.