Description

I am recommending the short sale of Thor Industries (THO), the leading producer of recreational vehicles and small- and mid-size commercial buses.  As I will discuss briefly below, there is much to like and admire about Thor, and in fact when I first started looking at Thor in early August, I thought it was an interesting potential long investment—and some day it will again be an interesting long given the favorable secular trends in its markets.  However, since then the stock has run up considerably on no real news.  Best I can tell, the stock’s run is attributable to the decline in oil and gasoline prices; though moderately helpful, the drop in fuel costs cannot nearly make up for the slew of macroeconomic headwinds confronting the Company.  Indeed, the only Company news over this time period was an announcement August 4 that fiscal Q4 (July) sales came in at $569 million, down 25% yoy and substantially below expectations.  I believe earnings will be quite poor for at least the next several quarters, and perhaps longer, and that the stock will retest its lows, making it an interesting short candidate (assuming the government will still allow shorts).

Thor has a wealth of information on the business on its website (www.thorindustries.com) so I will not spend much time describing the business, which is relatively straightforward in any event.  In addition, the Recreational Vehicle Industry Association (www.rvia.org) has good information on the industry, including data on historical unit shipments (some data must be purchased for a modest cost).  An RV is a vehicle that combines transportation and temporary living quarters for travel, recreation and camping.  There are generally two main categories of RVs:  motorhomes, which are motorized and within the industry sub-categorized based on their size; and towables, which as the name suggests are towed behind the family car or pickup.  The annual retail value of RV shipments approximates $14 billion according to the RVIA, with low end camping trailers selling for $4,000-$13,000; conventional travel trailers for $8,000-$65,000; small to mid-size motorhomes for $48,000-$140,000; and the largest motorhomes for $58,000 to as much as several hundred thousand dollars (think the Madden Cruiser for the ultra high end).  Demographics should drive RV ownership growth well in excess of overall U.S. household growth as the baby boom generation enters retirement and the prime RV ownership range of 55-64.

RVs represent over 80% of THO’s sales and a higher percentage of its profits.  Within the RV segment, THO is focused on towables, which constitute about two-thirds of revenues and historically have been among the (relatively) more stable and higher growth RV segments.  Its best known brand is Airstream, which you would recognize with their distinctive rounded shapes and bright aluminum finishes.  Class A motorhomes (the largest category) are constructed on medium-duty truck chassis supplied complete with engine and drive train components by motor vehicle manufacturers such as Freightliner, Ford, Spartan and Workhorse Custom Chassis.  THO then installs the living area and driver’s compartment that it manufactures in its facilities.  Smaller and mid-sized motorhomes are built on Ford, GM or Chrysler small truck or van chassis, which includes an engine, drive train components and a finished cab section.  THO then adds the living area.  The Company markets its RVs through over 1500 independent dealers, with different dealer networks for its various brands/subs.  THO does not finance dealer purchases, but it does execute repurchase agreements with the third party lenders that provide floorplan financing to dealers.

On the bus side of the business, the Company sells small and mid-size buses under the ElDorado National, Champion Bus and Goshen Coach brands (think shuttle buses and transit).  Some of the bus chassis, all of the engines and some of the seating and other components are purchased in finished form and assembled by THO in its facilities.  Over half of THO’s bus sales are made to state and local transportation authorities.

Since its founding in 1980, Thor has become, by really any available metric, the largest (28% share), best run and most consistently profitable producer of RVs.  It has a heavily invested management team that doesn’t sell shares, doesn’t take big option grants and returns capital to shareholders—indeed, in the past four fiscal years, Thor will have returned approximately $317 million to shareholders through dividends (including two special payouts) and stock repurchases.  It has a rock solid balance sheet with over $4/share in cash and investments.  As indicated in the financial figures below, it has had a great run in recent years until the industry slowdown that started in 2007.  All figures are for the July fiscal year.  2008 FY numbers are my estimates for the income statement and are April Q3 actuals for the balance sheet.

                 2005                       2006                          2007                       2008E

            Net Sales                                

                        RV                     $2,308.3                 $2,750.5                   $2,455.6                    $2,224.0

                        Bus                      $249.9                    $315.8                      $400.7                       $415.0

                        Total                  $2,558.1                 $3,066.3                   $2,856.3                    $2,639.0

            Gross Profit                                     

                        RV                          $314.3                    $406.6                      $328.8

                        Bus                          $21.3                      $24.9                        $34.5                       ____

                        Total                      $333.5                    $431.5                      $363.3                     $330.0

                        % margin                  13.1%                     14.1%                       12.7%                      12.5%

            EBT

                        RV                          $189.0                     $256.0                      $190.4

                        Bus                            $7.5                         $9.4                        $19.0                      ______

                        Total                       $189.4                    $256.1                      $196.9                       $160.0

            Net Income                          $119.1                    $163.4                      $134.7                       $99.0

            E.P.S.                                       $2.09                       $2.87                        $2.41                       $1.79

            EBITDA                                 $192.8                    $262.0                      $198.6                     $178.0

            Capex                                      $47.7                      $31.0                        $13.1                       $19.0

            Valuation

            Shares Outstanding                       55.5

            Price                                             $27.09

            Equity Market Value               $1,501.8

            Net Cash                                     ($247.6)

            TEV                                         $1,254.2

            P/E                                                    15.1x

            TEV/EBITDA                                       7.0x

Now that I’ve shared all the considerable positives about Thor—all of which will eventually make it a pretty compelling long idea—let me share why I believe there is at least 30% downside to the shares from current levels and very little risk of sustained near-term share appreciation.  RVs, like every other consumer durable that generally requires financing, face very bleak near-term prospects as we are in or about to be in a recession at the same time that we are in a credit crisis.  Whether diesel is at $3 or $4 is virtually irrelevant for the RV OEMs if their customers are not inclined to make a big ticket purchase in an uncertain economic environment and/or can’t finance such a purchase.  There have been some notable exits from the RV financing market (e.g., GE), and cashout mortgage financing that helped fund RV purchases simply isn’t available.  To my mind, in bidding up THO based on more affordable fuel, the market is pissing into the credit tsunami, with predictably deleterious consequences.

Thor’s own numbers point to a drastically worse near-term situation.  They missed Q4 consensus estimates for sales by nearly $100 million (~15%).  Before the Q4 announcement, the Street had THO 1Q09 net sales declining by only 19% on a 16% decline in backlog.  Actual backlog at fourth quarter end was down 31%, but RV backlog was down 60% yoy.  These are huge revenue misses, yet THO is UP over 40% since the announcement based on no discernable reason except fuel cost declines, while in the interim the credit crisis has intensified materially.  When the Company reports Q4 earnings, the profit figures are bound to be even worse given the operating leverage in the business and the fact that the RV business is much more profitable than the bus business, which had offset some of the top-line weakness in RVs.  As fiscal 2009 progresses, it will become increasingly clear that FY09 estimates are way too high and, barring a miraculous turnaround in the economy and credit crunch, this could be a sustained trough for the industry. 

Long term, THO will clearly be a survivor in an industry that is not going away, and it likely will come out the other side of this cycle competitively stronger.  As I indicated above, there is a lot to like about THO, but the valuation relative to the trends does not make sense.  History shows how brutal the cycle can be in this space, and the market does not seem to be pricing in anything but a short and shallow dip in the face of convincing evidence otherwise.

The key risks to a short are a short squeeze and a massive buyback at a premium, though I view the latter as low risk given the management’s very conservative bent.

Catalyst