The Worst Looks Over For THOR Industries

seekingalpha04-25

THOR Industries, a company that sells RVs and recreational vehicles, has experienced weakness in the market as of late due to decreased demand.While painful, the picture is showing signs of ...

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Logical thoughts guided the direction that shares would eventually go, with all information or most information already factored into prices the moment it came out. Value investing challenges this thought process, with the idea that, at least in the short term, the market can be wrong. This is because of information asymmetry and the role that emotion can play into the investing process. The result of this, if the value investing approach is correct, as I believe it is, is that you can be wrong for some time before the calls that you make ultimately turn out in your favor. As an example of this, we need only look at THOR Industries, Inc. (NYSE:THO), a company that focuses on selling RVs, camper vans, travel trailers, and other types of recreational vehicles. In my last bullish article about the company, published in early June 2023, I recognized that the industry was experiencing weakness. This was caused by strong demand during the early days of the pandemic, demand that could not last forever, as well as by inflationary pressures and high-interest rates. Ultimately, though, I recognized that the industry would recover and that shares were cheap enough to warrant upside when that took place. Fast-forward to today, and we are still seeing some weakness in that market. Truthfully, that weakness is likely to extend through a good part of this year at least. As a result of this, shares have seen an upside of only 13% since I last wrote about the enterprise. That compares to the 21.3% increase seen by the S&P 500 (SP500) over the same window of time. Despite these troubles, data does seem to suggest that the worst is behind us. And while shares are not the cheapest out there, they do look fairly attractively priced, especially if we assume an eventual recovery in the space. Because of this, I have decided to keep the business rated a \"Buy\" for now. Signs of Improvement Author - SEC EDGAR Data When speaking about matters from a purely fundamental perspective, there's no denying that times have been better for THOR Industries. As an example, look at results covering the second quarter of the 2024 fiscal year. This is the most recent quarter for which data is available. During that time, sales for the company came in at $2.21 billion. That's 5.9% lower than the $2.35 billion generated at the same time one year earlier. This drop was driven by significant weakness in both the North American towable market and the North American motorized market. THOR IndustriesTHOR Industries For towable products, sales dropped 11.9% even as the number of vehicles sold increased from 19,934 to 21,958. The real pain for the company came from a 22.1% plunge associated with changes in product mix and lower prices. Given the current environment, it's not surprising that the company applied larger sales discounts to many of its products. However, a shift toward cheaper offerings by customers also played a role in this, as did a reduction in input costs that management was able to pass on to customers. THOR Industries The North American motorized market was not so lucky. Revenue for that category declined by 22.8%, with the number of vehicles sold falling an impressive 18.4% from 5,438 to 4,438. Lower prices, particularly when it came to Class B and Class C units, hit the company, with a decline in dealer and consumer demand corresponding with higher discounting to try and offset weak demand. Also, the shift toward more affordable offerings played a role in this. Interestingly, there was one bright spot for the company. And this bright spot involved its European operations. Revenue actually spiked by 20.9%, rising from $646.9 million to $782.3 million. The company actually benefited on this front from a slight increase of 3.9% in the number of vehicles sold. They grew from 12,588 to 13,080. The company especially benefited, not only from a volume perspective but also from an increased pricing perspective, when it came to Motor caravan products. This was because, as supply chain issues eased, the company was able to meet pent-up demand. Author - SEC EDGAR Data The decline in revenue brought with it some weakness on the bottom line. Net profits fell from $27.1 million to $7.2 million. Operating cash flow was even worse, going from $91.3 million to negative $103.9 million. Even if we adjust for changes in working capital, we get a decline from $100.4 million to $69.6 million. Finally, EBITDA for their business fell from $106.7 million to $86.4 million. In the chart above, you can see that financial results for the first half of 2024 relative to the first half of 2023 were similarly bad. Revenue fell, as did profits and cash flows. So the second quarter on its own was not some blip on the radar. Author - SEC EDGAR Data In the near term, investors should expect this kind of pain to continue. Backlog in the second quarter of the year, for instance, totaled $4.66 billion. That's down rather substantially from the $5.36 billion reported for the first quarter of this year. And that's down significantly from the $8.76 billion the company had at the end of 2022. In fact, this weakness shows up in management's forecasts for the year. They anticipate revenue of between $10 billion and $10.5 billion. In addition to this being down from the $11.1 billion reported for 2023, it's also down from the previously expected range of between $10.5 billion and $11 billion. Management also revised lower earnings guidance, with profits per share expected to be between $5 and $5.50. Prior guidance pegged this at between $6.25 and $7.25. This should translate to net profits, at the midpoint, of about $281.7 million. This stacks up poorly against the $374.3 million reported last year. By annualizing results seen so far, we get an anticipated adjusted operating cash flow of about $439.4 million and EBITDA of $588.1 million. THOR IndustriesTHOR Industries At this point, many investors might wonder why I am still bullish about the firm. But it really boils down to two things. For starters, we are starting to see some bright spots in this market. In the North American RV wholesale market, for instance, it's expected for there to be around 350,100 shipments this year. That's up from the 313,174 shipments generated in 2023. As illustrated by the image above, similar improvements can be seen for the towable RV wholesale market and for the motorized RV wholesale market. You can also, in the image below, see some data regarding the European nations in which the company operates. While 2023 marked the third consecutive year of pain for the space, we are starting to see some results moderate. This is especially true when it comes to motor caravans. Author - SEC EDGAR Data What this all suggests is that we are either at or very near to the bottom of the industry. The other thing, though, is its shares look decently priced even with this likely bottom. Using the estimates for 2024 and historical results for 2023, I valued the company as shown in the chart above. And even if we use the more expensive forward estimates, when compared to five similar firms as shown in the table below, we end up with the enterprise around the middle of the pack.   Company Price/Earnings Price/Operating Cash Flow EV/EBITDA   THOR Industries 20.0 12.8 11.5   Winnebago Industries (WGO) 19.7 7.8 10.2   Lazydays Holdings (GORV) 126.7 110.3 12.3   LCI Industries (LCII) 44.2 5.4 14.1   Camping World (CWH) 45.6 5.7 12.0   REV Group (REVG) 5.7 21.5 2.9   Click to enlarge Takeaway All things considered, I would say that now might be a good time for those who are bullish about THOR Industries to consider the company as a serious prospect. The industry seems to be improving and shares look attractively priced. While there is always uncertainty in the picture, I view this as an industry that will continue to see demand down the road. Absent something significantly changing for the worse, I would argue that THOR Industries, Inc. stock probably does have some decent upside for it. Because of this, I have no problem keeping it rated a \"Buy\" even though there could be some additional issues, such as a slower recovery, moving forward.  Editor's Note: This article covers one or more microcap stocks. 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