THO - THOR: A New Hope Amidst The Wagon War

2023-05-17 05:41:14 ET

Summary

• THOR Industries, Inc. saw relatively weaker and slower performance this fiscal year.
• Its excellent financial positioning is one of its sturdy cornerstones.
• Near-term market prospects are quite discouraging, but opportunities are still present.
• It continues to raise dividend payouts with decent yields.
• The stock price has been moving sideways after its sharp decrease.

The automotive industry experiences headwinds as the impact of inflation intensifies. And even an RV giant like THOR Industries, Inc. (THO) is no exception. It faces disruptions with its hammered revenues and margins. Thankfully, it has adequate capacity to sustain itself. Indeed, its core operations are founded on its solid financial positioning. It can cover its current size and borrowings despite the stormy market landscape.

Moreover, the company remains a secure dividend stock. Dividend payouts continue to increase, matched with decent yields. Meanwhile, the stock price remains in a downward pattern but appears logical. It is still consistent with the fundamentals and market sentiments. But the actual investment returns and undervaluation provide enticing upside potential.

Company Performance

Market headwinds intensified in the past year as inflation accelerated in 2022. It set a new all-time high, peaking at 9.1% in 2Q. It matched the ongoing tension in Europe and further disrupted supply chains. As such, average price levels across industries soared. It was most visible in the energy sector as gasoline prices reached $5.032 per gallon. And although various vehicle types have already gone electric, budget constraints and efficiency remained the top concerns. These negative spillovers affected the RV industry. Even a giant like THOR Industries, Inc. did not avert the blow.

The operating revenue in 2Q 2023 amounted to $2.35 billion , a 41% year-over-year decrease. But the combined value for the first half of its fiscal year exceeded pre-pandemic levels. From there, we can infer that the decrease was primarily due to the cooling demand from FY 2022. Lower unit shipments, labor constraints, delays, and supply chain changes were some contributors. Yet, all these aspects could be attributed to inflationary headwinds. The massive increase in prices hurt the production capacity and purchasing power in the RV market. The expensive gasoline prices affected RV demand and rentals. And although inflation started to slow down in 4Q 2022, cost-of-living adjustments took time to adjust. It may also mean that the pent-up demand for RVs has already ended. On a lighter note, we can account for seasonality since RV demand is generally lower during winter.

With regard to its peers, THOR underperformed in the market. Its revenue decrease in the RV segment was higher than the peer average of 10%. It also had the second-highest decrease in the market, only a 3% difference from Horizon Global ( HZN ). Even worse, it was lower than its close competitors like Winnebago ( WGO ) with -17% - and Forest River (BRK.A) with -7%. Only REV Group ( REVG ) saw impressive revenue growth of 19% in the same season.

Thankfully, THOR stabilized its costs and expenses. It adjusted its production level in the past three quarters to make up for the massive revenue reduction. It proved effective as costs and expenses have consistently dropped. Indeed, the contraction helped the company improve its operational efficiency amidst the rising prices and softening demand. The combined amount landed at $2.24 billion versus $3.51 billion in 2Q 2022. However, it did not fully offset the impact on revenues. The operating margin was only 4.8% versus 9.2% in 2Q 2022. Nevertheless, it stayed viable, showing its resilience and efficient asset management.

This year, THOR may face similar challenges as demand remains relatively low. Recession fears may also affect its performance. Even so, Spring and Summer may have a positive impact. The changing consumer behavior and macroeconomic indicators are also crucial. We will discuss these further in the following section.

How THOR Industries, Inc. May Stay Afloat This Year

We already saw the impact of market volatility on THOR Industries, Inc. Yet, it seems that the impact may persist for quite some time. It may be logical, given the expected recession in the US. Interest rate hikes continue as The Fed remains conservative. If it continues, individuals and entrepreneurs may be more enticed to save rather than spend, borrow, and invest. It can also make borrowings more expensive and increase the interest expense. THOR may have to watch out for these changes, given the continued softening of demand .

Despite this, we can see sprinkles of hope as inflation continues to relax. It decelerated in 3Q 2022 before decreasing substantially in the following months. At only 4.9%, inflation is already 47% lower than the 2022 peak. We can also see the consistent decrease from its peak. Indeed, the efforts of The Fed paid off and helped stabilize inflation. Likewise, gasoline prices are now only $3.711 per gallon, 27% lower than the 2022 peak. If the inflation and gasoline price downtrend continue, purchasing power may rebound. It can also help the company set more strategic pricing while keeping costs and expenses low. It is timely since summer is approaching and may entice demand and rentals.

Aside from that, the company can capitalize on consumer behavior. With the continued decrease in inflation and gasoline prices, revenge travel may persist. A recent survey shows that 49% of Americans plan to travel more this year than in 2022. Meanwhile, 38% plan to travel the same as in 2022. The coming summer may be its peak as 85% of Americans may travel this summer. It may be possible, given the relaxing inflation. The labor market transformation may give more positive spillovers in the company. A recent study shows that over two-thirds of Americans are traveling more often due to remote work flexibility. Others plan to increase their travel duration. This pattern may continue since 74% of companies plan to continue or employ hybrid setups at work. As such, the increased work flexibility may allow more employees to travel even while working.

Moreover, the RV industry is here to stay. RVs are not exclusive to Baby Boomers and Gen Xs. Even the Millennials and Gen Zs are appreciating its features. The majority of American travelers plan to take an RV trip, primarily due to higher availability, travel privacy, and lower travel expenses. In the hopes of a continued inflation decrease, over 70% of Millennials plan to take an RV road trip this year.

But what makes THOR a solid company is its excellent financial positioning. As an RV seller, THOR relies heavily on its capital to sustain its operations. Its cash reserves are relatively stable at $282 million. Meanwhile, it continues to lower its financial leverage, given its current borrowings of $1.81 billion. It is impressive since interest rate hikes continue, and decreasing borrowings can help improve liquidity. It also has adequate earnings relative to its operating capacity and borrowings, given the Net Debt/EBITDA Ratio of 1.14x. We can confirm its operational strategies and liquidity in the Cash Flow Statement. Its Cash Flow From Operations decreased, but it could still cover its CapEx. With that, the company made the right decision to reduce its production volume. It continues to balance growth and viability with sustainability.

Stock Price Assessment

The stock price of THOR Industries, Inc. has been moving sideways in the past year. But the downward pattern stays prominent. At $78.90, the stock price is 7% higher than the last year’s value but 16% lower than the 2022 highs. It also decreased by 4% from my previous coverage . Despite this, price metrics show that the stock price remains a good bargain. We can use the PB Ratio, given the current BVPS and PB Ratio of 70.78 and 1.11x. If we use the current BVPS and the average PB Ratio of 1.47x, the target price will be $104.04.

Moreover, the company remains a secure dividend stock, given its consistent payouts. Dividends continue to increase with a decent yield of 2.28%, better than the S&P 400 average of 1.69%. Last month, it distributed payments of $0.45 per share. It also makes capital returns through share repurchases, amounting to $25.4 million. We can even check the stock price relative to company earnings to determine the actual investment returns. Since 2018, the company generated a cumulative value of EPS of $38.94. Meanwhile, the actual stock price gains and losses amounted to $38.99. It shows that for every $1 increase in EPS, the stock price rose by $1. These show the consistency of the stock price to the fundamentals of the company. To assess the stock price better, we will use the DCF Model.

FCFF $396,800,000

Cash $281,500,000

Borrowings $1,880,000,000

Perpetual Growth Rate 4.4%

WACC 9.2%

Common Shares Outstanding 53,519,000

Stock Price $78.90

Derived Value $98.20

The stock price adheres to the supposition of a potential undervaluation. There may be a 24% upside in the next 12-18 months. Hence, investors may consider buying shares at a discount.

Bottomline

THOR Industries, Inc. may not be as mighty as it was in the past two years. But it continues to show operational stability as it tries to handle macroeconomic volatility. It has a solid financial positioning, allowing it to cover its current capacity and capital returns. Also, the stock price stays undervalued with decent upside potential. The recommendation is that THOR Industries, Inc. is a buy.

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