Description

I’m long Thor Industries which is the largest RV maker in the US and world.

The RV industry can be divided into motorhomes and towables. Motorhomes have plateaued and sales have only recovered to pre-GFC levels. There is no indication that motorhome sales will increase, and it seems to have found its steady state at the current time. Motorhomes only represent 10% of Thor’s units and 20% of EBIT.

Towables is a different story, as this segment keeps growing and setting new sales records year after year. Towables looks like secular growth. I think there are a bunch of reasons for the shift: (1) people in the US love pickup trucks, (2) towables are cheaper than motorhomes, (3) towables are easier to maintain, (4) towables are more convenient and offer a better experience for camping. Motorhomes are less flexible, much more expensive, and are more for road warrior types. Thor has 17 brands covering both segments, why there are so many nameplates under one company I don’t know…just a function of years of consolidation I guess. Some brands have their own niche while others admittedly seem more generic. The most well-known Thor brand is Airstream, the iconic aluminum trailers which command giant price premiums. What can I say, they’re cool.

There is another big change that’s providing a major uplift to demand: ride sharing services. RV’s are expensive and take up a lot of space and they depreciate like crazy, so if someone who pays $50,000 for a trailer can squeeze out $20k in rental fees over the life of the vehicle, it’s a huge win. Sites like RVShare and Outdoorsy have been popping up and there is one public company involved with this, Tourism Holdings (THL NZ) which is based in New Zealand. Even though their rental operations are in New Zealand and Australia, they also own a large dealer in the US. Their rental business has boomed in recent years and sharing has opened up a whole new group of customers. (THL and Thor have a JV for some tech-related stuff including a Tripadvisor-like application called Roadtrippers which could maybe turn into something worthwhile one day) This has also helped draw in younger customers, and RV buyers are increasingly younger than they’ve ever been. Renting an RV is also a fraction of the cost of other types of vacations. The sharing services still seem to be very immature and not well understood by most owners of RV’s, who are older, but this will change over time. The trends for towables are just really good and supportive of increased market penetration probably for longer than people think. Motorhome is a different story and I assume it’s like the motorcycle business in that it’s not going to ever grow again.

Thor announced they were buying Erwin Hymer Group (“EHG”) in October for $2.1 billion in a mostly cash deal. EHG is Europe’s largest RV manufacturer, making smaller motorhomes. Europe is the mirror image of the US, they lean heavily towards small motorhomes while towables is almost nonexistent (Europeans don’t have a love affair with pickup trucks). There was pathetically little financial information released along with the announcement and it has created a lot of confusion and skepticism as people wonder if Thor picked a bad time to lever up and make an acquisition. The RV market in Europe hasn’t skipped a beat lately and it continues to grow at a low or mid single-digit pace. There was recently a minor panic over the deal when Thor and EHG carved EHG’s Canadian operations out of the transaction after discovering some fraudulent accounting. This was a small subsidiary from a company EHG acquired a few years ago and both companies believe it was an isolated problem. Nevertheless, the headlines it created were concerning. I don’t believe there is anything to worry about, but I admit it’s a leap-of-faith. EHG’s EBIT margins are slightly higher than Thor’s, and the deal looks like it should be significantly accretive by anywhere from $1.50-4.00 in EPS. Thor is now levered at 2.2x and intends on using most of their FCF to pay down debt. I estimate they will be able to pay everything off by the middle of 2023, assuming nothing crazy happens in the market. For now, there seems to be a lot of uncertainty from the deal.

In the US, the RV sector overheated in 2017 and 2018, a combination of low interest rates, low unemployment, high consumer confidence, and even more, the positive trends affecting consumer tastes and preferences which really seemed to shift things abruptly into high gear. Unit sales spiked to unprecedented levels and everyone in the industry got ahead of themselves and dealers overordered inventory. In the last couple quarters, this has been unwinding and dealers are returning to normal inventory levels. This has translated into massive declines for OEM’s and Thor has seen its backlog fall by ~50%. Historically, this is when you should buy these kinds of companies. The industry is doing what everyone else does in these situations – they’re overreacting too far in the other direction. RV makers like Thor were written up as shorts multiple times on VIC – the authors were right, but I think the trade is now over and it’s a good buying opportunity and the stock is back to 2014 levels.

Thor is a surprisingly good business. They have a 50% market share while the #2 player, Forest River, has 35% share and is owned by Berkshire Hathaway (purchased in 2005), hopefully giving us at least some minor validation that this business is better than it appears, not to mention a rational #2 competitor. Winnebago only has 7% market share and it’s mostly in motorhomes. Other players used to hold about 33% market share pre-GFC but after industry consolidation it’s down to just about 10%%. Incredibly, Thor never even lost money during the GFC and they were profitable in 2009. Actually, Thor’s towable segment had a 5% GAAP EBIT margin that year even though volumes fell 70% from peak. Their motorhome business generated a loss in 2009 with -18% EBIT margin. I don't think judging companies by the GFC is really fair, you'd never end up buying another stock again. 

Anyway, I was surprised at how well managed Thor has been. Management isn’t shy or apologetic about flexing down employees and hours when the market pulls back. Yeah, it’s still a cyclical business, but this is one that will still generate a respectable profit even when things get bad, and it isn’t going belly up during a bad recession. As another example, in Q1 (October) despite a 21% decline in revenue, Thor’s EBIT margin was still 6.6% and they earned proforma $1.32 in EPS vs $2.43 the prior year. Thor generates excess FCF when revenues decline, for example in 2009 they generated $43 million ($.77/share) in FCF but only $15 million ($.27/share) in net income. The company will generate an 8-9% ROIC in FY19 with sharp revenue declines, and in every other year where things aren’t blowing up, the ROIC is 20-25%. Again, if this is a crummy, cyclical business, I can’t really find much evidence of it.

There are already tangible signs of a decent if not strong recovery underway in the RV market.

“We missed a little bit in January because we had that unforeseen week down at the end of the month with weather, but the rest of the quarter looks decent from what we see with orders already, I'll probably say it a couple of times during the call but our largest customer [Thor] called us this week and put all their plants back up to 5 days in March. So that's part of the light of the end of the tunnel we've been looking at. They wouldn't do it if they didn't feel that their order book and their outlook was good enough because everybody's been in a real conservative inventory tightening mode and production tightening mode.” – LCI Industries, 2/7/19

“RV OEMs have demonstrated their ability to flex their production scheduling in alignment with newly created capacities to better and more efficiently align with seasonal dealer inventory needs. The short-term 2018 inventory buildup has been aggressively managed by both OEMs and dealers alike, and likewise, we have flexed with them. We believe that lead times to dealers have been reduced and that we are likely operating at the lowest level of weeks-on-hand retail inventories in the last 4 years, based on our estimates. Our estimates show that dealer inventories have improved in the last several months with approximately 47,000 net units being pulled out of the channel from April through December. Dealer confidence in the shortened lead times and aggressive floor plan line management have continued into the first quarter of 2019, as expected, with anticipation that if the weather breaks, OEM schedules will flex up accordingly.” – Patrick Industries, 2/14/19

Comments from related companies in the dealer (Camping World, THL) or camping spaces (Thule, Dometic) have also been at a minimum supportive that the bottom is near. There have been two recent annual RV shows, a large one in Florida and another one in Chicago, and all commentary from these have been strong, with dealers indicating the same or better interest and attendance from a year ago. Sell-side analysts have taken note and have been slowly raising numbers. All of the macro inputs – housing prices, unemployment, interest rates, consumer confidence – are still flashing green. Aside from the overexuberance in the RV market that was correcting, we saw a large drop off in housing and some other large ticket purchases in Q4 which seemed like a perfect storm for RV’s. Why did all that happen? I don’t really know, but my own belief is it was media driven from China and government shutdown…nothing “real” actually happened in the economy, as is now evident. I expect the next 2-3 quarters to remain somewhat ugly when it comes to units and revenues, but this is no secret and it appears to be priced into the stock. The minute Thor puts up a better-than-expected quarter, the stock will do well as people price in a recovery.

Thor will earn at worst $5.00 in EPS in FY19 (July FYE) in a really lousy scenario where revenues decline 20-25%. The sell-side pegs EPS at $6.50. Merely a pathetic recovery will see them earn at least $8.00 in EPS in FY20, and just a couple years of mid single-digit unit increases in towables (with mothorhomes flat after this latest blowup) should see Thor earn $11-12 in EPS by FY22/23. If towables growth continues, $13-14/share in FY23 is easy. I keep trying to blow this company up in my model and I can’t, the assumptions start getting ridiculous, worse than the GFC. I don’t think it’s crazy that Thor could generate record profitability in a few years given the consolidated nature of the industry and Thor’s management history. Demographic trends are good as well.

The stock’s forward P/E multiple has ranged from 12-17x. This implies Thor is worth today a worst case of $60/share. At 14.5x P/E and $8.00 in EPS the stock is worth $116/share for a 70% return. There is upside beyond that if the world doesn’t blow up, and I think Thor could be justifiably worth $175/share in three years. If things go well, which isn’t that crazy, a stock price over $200/share seems easy. As another signpost that Thor is cheap, its EV/S multiple recently bottomed in December at .3x, the same multiple it bottomed at in 2009. At $68/share today, you’re paying about 8-9x mid-cycle P/E for the company, and again, I just think history shows the time to buy is when revenues have collapsed, and this is a surprisingly good company. The stock is down 60% from its peak but the company is by any measure generating respectable returns considering the short-term fundamentals.

Thor has a unique approach to investor relations by not holding earnings calls. Instead, they put out their own Q&A with each set of results. The executive chairman, Peter Orthwein, founded the company and he is highly regarded by many people. He owns $130 million worth of stock and hasn’t sold much. NEO’s are very well-compensated at the company. On one hand, it seems high especially for being headquartered in the middle of Indiana, on the other hand they can attract the best talent in an industry with limited employers. The primary metric used to calculate bonuses is pre-tax profit. While I usually prefer something per share-based, Thor’s share count has slowly decreased over the last couple decades, so the point is somewhat moot.  Also, all incentive comp is in stock. The board is classified but again, the company has a clean record of treating shareholders well. The company has never attracted any activists or caused much of a stir in the capital markets in general, and it’s almost always owned by mutual funds instead of hedge funds.

Catalyst

If this RV is a rockin...