Turns out my article on Thor Industries (THO) a couple weeks back was poorly timed. Who knew we were on the cusp of a de-risking episode? As a shareholder in Thor Industries, this may simply be my biased perception, but it sure feels like there has been some especially hard selling across the RV spectrum during this particular bout of selling pressure.
THO sold off from $103 per share when my article was posted down to $85 and change per share in a matter of two weeks with most of the damage occurring in a couple trading sessions. So the question I was pondering to myself during that period was what do you have to believe in order to justify dumping THO stock at $85 per share? In order to take stab at that question I started digging through some data.
The chart below shows THO’s revenue from 2000 through trailing TTM ending with reported Q1-2022. Simply put, THO’s revenue has grown from the lower left to the upper right over the preceding two decades.
Source: Data compiled from 10K filings.
During this time period, THO experienced 3 periods of revenue contraction. First the dot-com bust of 2000/2001 during which revenue declined about 10%. Second, the Great Financial Crises, when revenue declined 57% over a 3 year period and last and most recently in 2019, in which revenue declined 6%. It is fair to note that not all of Thor’s revenue growth over the years was organic as inorganic growth (aka acquisitions) have played an important role in supporting top line revenue growth. So while it is worthy of noting that THO has utilized M&A to help drive top (and bottom line) growth over the years, I would also suggest that there is nothing to say that THO will be prohibited from inorganic growth going forward – so just keep this in mind for now.
Additionally, I would point out a few points from the slide below which management included in their most recent quarterly updates.
I would draw your attention to the level of inventories at the independent dealership network, shown on the top right, as well as the lower right panel which shows the level of backlog which reached a record at $18B. Even if there is some slippage from order cancellations, the backlog will still be sizable compared to the past 4-5 years.
Next let’s take a look at margins.
Thor Industries has managed profitability over the past 22 year period in an impressive fashion. Best I can tell, THO didn’t actually post a loss on an annual basis over the two decade period included in the data. From my perspective, managing the business to eke out a profit in the face of a 50-60% revenue contraction is an impressive performance. While there is no guarantee THO will be able to avoid losses in the future, I have to believe such a stout performance bodes well for the capabilities of THOR’s people, brands and assets to manage the business through the ebbs and flows of the cycle. That doesn’t mean losses won’t eventually occur…it simply means they have demonstrated an ability to manage the business through the cycle.
So now that we have considered a few key data points on revenue and margins, let me re-ask the question at hand…assuming you are a long term investor, what would you have to believe in order to rationalize dumping THO stock at $85 per share?
The company generated $13B of revenue in the most recent TTM with an EBT margin of 7.4%. Assuming a WACC of 12%, I estimate you would have to believe that revenue will decline by 30% per year over the next 3 years and stagnate from there while simultaneously EBT margins have to fall from 7.4% to 3% for the next 3 years before returning to long run median levels around 7%. Putting those inputs into the greater context of the two plus decades worth of data – which demonstrates impressive revenue growth and resilient profitability even in the face of adversity – an investor dumping shares at $85 per share is essentially betting that the U.S. and to a lesser extent Europe are about to hit the second Great Financial Crises (or something of the same scale but perhaps more of a direct impact to the RV industries). While anything is possible, I do not view this scenario as the most likely scenario to unfold over the next 1-3 years – particularly when you consider the dealership inventory levels and the tremendous backlog that Thor is working through. And I am not saying there won’t be a slowdown ever again. There could be a slowdown. There could even be a slowdown next year. All I am saying is that I do not believe betting that there will be a GFC level scenario playing out in the next 3 years is a good bet – in my view that is probably a bit too extreme to be betting on.
So what did I do when shares were in the mid-$80’s? I added to my position. In my view with my own assumptions, THO is worth considerably more than $85/$95 per share. So I remain constructive on the shares going forward.