Thor Industries: What the Market is Missing

In a recent edition of Value Investor Insight, Clyde McGregor of Chicago's Harris Associates L.P. described why he sees unrecognized value in Thor Industries (THO).

The market has been unkind to recreational-trailer maker Thor Industries. What is the market missing?

CM: The company was started by investment bankers – who still run it – more than 25 years ago and it is now the largest player in the market for tow-able recreational trailers, while also selling RVs and small and mid-size buses. We’d looked at the company off and on for years, but took a closer look in 2006 after Berkshire Hathaway had bought Forest River, the number-two market player after Thor. We found a business with high returns on equity and capital, no debt and an experienced and shareholder-focused management and board that owned nearly 40% of the shares and never sold. The stock was then in the mid-$40s, but we couldn’t justify buying at that price.

What’s hit the stock since is all the macro negatives for a business selling high-priced consumer durables like recreational trailers and RVs: high gas prices, dried-up credit financing and a cutback in consumer spending. We knew going in – we started buying shares last December – that this was a cyclical business, but we’ve also observed and respected the fact that the company tends to grow the intrinsic value per share of the business from one cycle to the next. They’ve been particularly good buyers of distressed properties, which they then build into significant operations. When you find companies like that, buying opportunities arise when you think the sector they’re in has been beaten down enough. It turns out we’ve been quite premature in that assessment so far.

In retrospect, why?

CM: We knew that the housing market was headed for trouble, but I personally thought all the talk about consumers using their homes as piggybanks was overdone. The evidence so far would suggest that talk wasn’t overdone, so anyone who’s producing durables – whether Harley-Davidson or Brunswick or Thor – is reporting problems.

If we’re going to be exposed to the space, we want to be exposed in a way that we’re protected on the downside, which is the case here. They have a great balance sheet, high-quality and well-respected brands and smart management. The growth will come from positive long-term demographics as people like Ed and me approach retirement and start traveling more. As long as gas prices remain high, we also expect tow-able trailers to take market share from big RVs. In the end, this is a business that has historically done well and should do well again.

What upside do you see for the shares, now trading at $30.50?

CM: As I said, the company has historically increased intrinsic value per share from cycle to cycle. We see no reason for that to change, so even if they just got back to the earnings level and valuation of two years ago – which could certainly happen within two years from now – the share price would be in the low $50s.

We may be looking through a deeper valley than we expected – which has given us more opportunity to buy on the way down – but we can still see the other end.

Any insight into the very high short interest in Thor?

CM: We don’t pay a lot of attention to that, but I’d imagine short interest is high on a lot of consumer-durable stocks like this. The shorts have been right in the past six months, but that’s not our time horizon.

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Comments

[MD]

Great interview. Thor is indeed a good looking company. It's been on the "Magic Formula" screen for some time, and as Clyde states, has excellent return on capital figures and no debt. Cash yield at today's prices is over 11%. Very good opportunity.

Steve
magicdiligence.com
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