Thor Industries: A Solid Business For A Discount Price

Summary

• COVID-driven lifestyle changes provide support for the RV industry.
• Thor Industries, a market leader in the RV space, has reported strong earnings and a massive increase in the order backlog.
• At a 7x EV/EBIT multiple, compared to 10-year average of 10/11x, reflects future expectations that are not aligned with the fundamental backdrop, in my view.

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From a strictly business/economic perspective COVID-19 has provided a big boost for some industries and created immense challenges for other industries. The RV industry has been an industry that received a big boost. You see, COVID-19 changed how many people are living their lives. More and more people are adopting a work from anywhere model while others have taken on a working model that involves less than five full days in the traditional office space - both of which enable a whole new range of work solutions for how and where to work as well as revisiting how people strike a work-life balance (or imbalance) that works best for them. Additionally, international travel for recreation remains largely curtailed and logistically problematic and who knows when this will meaningfully improve. And the labor market remains as tight as it has been in decades which, in principle, implies wage inflation is likely to remain a persistent force going forward, adding to household discretionary income. Incidentally, most of these factors cast a favorable backdrop for the RV industry, and due to my growing obsession with Airstream, I have been looking more and more into Thor Industries (NYSE:THO) as an interesting opportunity for consideration.

Thor Industries, Inc. designs, manufactures, and sells recreational vehicles (RVs), and related parts and accessories in the United States, Canada, and Europe. The company offers travel trailers; gasoline and diesel Class A, Class B, and Class C motorhomes; conventional travel trailers and fifth wheels; luxury fifth wheels; and motorcaravans, caravans, campervans, and urban vehicles. It also provides aluminum extrusion and specialized component products to RV and other manufacturers; and digital products and services for RVs. The company provides its products through independent and non-franchise dealers. The company was founded in 1980 and is based in Elkhart, Indiana.

I would also note that approximately 2/3 of the company's business occurs in N. America, so THO has been a significant benefactor in shifting preferences in how U.S. based folks are taking recreation.

At its core THOR's business is cyclical in nature - i.e. during recessions demand tends to decline (as measured by unit shipments), and during strong economic times, unit shipments tends to grow. During 2018/19 unit shipments actually declined but due to the impact that the global pandemic had on how people in the U.S. recreate, demand for RV industry products received a massive resurgence. The relevant question now is how long will strong demand persist and how is that outlook manifested in the share price - if at all?

From a value multiple perspective, THO is currently trading around 7x EV/EBIT - far below the average over the past 10 years - which eyeballing appears to be closer to 10/11x.

Source: Seeking Alpha

I would argue this is most likely because "Mr. Market" is pricing in a significant deterioration in earnings in calendar 2022 and beyond. However, the company's backlog of RV orders hit an all-time record by the end of THO's fiscal year-end (October 31, 2021):

Source

Considering the scale of the backlog that has developed over the past 2 year period, it seems a bit premature to conclude that demand in 2022-23 is more likely than not to fall off a cliff.

Maybe "Mr. Market" is right but, before jumping to that conclusion consider two additional near-term data points which suggest that the company is trading for a price that suggests THO represents a halfway decent value proposition. First, an insider (the co-founder of the company and Chairman Emeritus of the Board) purchased 10,000 shares around $103 per share - roughly a $1MM vote of confidence in shares near current levels. And subsequently, THO recently made a proclamation that they believe shares are undervalued and as such despite a long history of buying back shares sparingly, they announced a $250MM buyback program which will expire at the end of 2024.

While $250MM may not seem like an Earth-shattering number, I personally think it is just the beginning (so long as shares remain undervalued). Take a look at the cash generation THO has been putting up over the past several years. Cash generation at THOR has grown nicely since 2014 and to the extent the favorable backdrop remains intact, the company will likely generate plenty of surplus cash which can be used to further strengthen their position within the RV industry, continue growing the dividend, reduce debt, and not only complete but actually add to their recently announced repurchase program (and probably well ahead of the scheduled expiration date, but that is just me speculating) - which is exactly what they state their strategic intentions are in the following slide:

Source

Now on the risk front, there are at least a few business risks worth mentioning at the moment. First, there is likely exposure to interest rate risk in this business. The affordability of RVs has no doubt been enhanced by the relatively cheap cost and open access to credit (thanks Fed!) and if/when interest rates rise meaningfully in the future and the credit market tighten, in principle it could take a toll on THOR's marginal customers - the customers who are more likely to approach RV based recreation from a purely discretionary perspective. I say marginal customers as those planning to go full time for some period of time or exclusively focus their recreational time on RV-oriented travel are probably not as sensitive to a few additional points on their credit arrangements. I have to wonder if the interest rate risk element of this story is one reason that shares in THO have dropped from $140 to $100 during the same time period the Fed has cast the appearance that they are growing concerned about inflationary pressures.

Another risk that could be top of investors' minds is that the demand jolt felt across the industry which in some part is likely attributable to the level of disruption that has occurred to international travel and investors could be thinking that RV recreation will give way to international travel once the logistic challenges and challenging COVID-19 policy protocol constraints are removed at some point in the future. While international travel will surely recover in the future, I am not so sure this represents a significant risk to THOR's business in 2022/23.

And the final risk I will touch on at this point is inflationary pressures which are driving the COGS for virtually all businesses that manufacture goods. However, to date, THOR seems to be on top of this. THO reported in their first quarter of fiscal 2022 they managed costs quite effectively as gross margins expanded low-single-digit percentages across their N. American business which represents roughly 2/3 of their revenue. Additionally, with the intended purchase of Airxcel, the folks at THOR are demonstrating a willingness to integrate the supply chain which should enable an additional layer of cost management which is not always available to company's who are opposed to vertical integration in their respective supply chains.

With strong earnings, a mammoth backlog, growing dividend, insider purchases, a newly announced buyback program, and a share price on-sale from a value perspective relative to its 10-year history, THOR seems worthy of a second look.

Thanks for reading!

Analyst’s Disclosure: I/we have a beneficial long position in the shares of THO either through stock ownership, options, or other derivatives. 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.