Can Thor Industries Keep Riding Higher?

By Markets Fool.com


Image source: Thor Industries.

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When a company hits its groove, it can often produce amazing growth over long periods of time. That's what investors in recreational vehicle specialist Thor Industries (NYSE: THO) have seen lately, with low gasoline prices and an improving economic picture in the U.S. contributing to a rise in demand for RVs. As investors prepare for Thor's fiscal fourth-quarter financial report, which is scheduled for release within the next week, they hope that the RV company will keep riding the wave of success and keep competing effectively against Winnebago (NYSE: WGO) and other peers in the space. Let's take an early look at what's been happening with Thor Industries and whether its momentum is likely to continue.

Stats on Thor Industries

Expected EPS Growth

16.7%

Expected Revenue Growth

19.6%

Forward Earnings Multiple

13.9

Expected 5-Year Annualized Growth Rate

8.7%

Source: Yahoo! Finance.

Can Thor Industries keep boosting its earnings?

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Investors have had slightly mixed views about Thor Industries' earnings in recent months, but on balance, the outlook has been positive. Investors have cut a couple cents off their projections for the fiscal fourth quarter, but they've boosted their fiscal first-quarter estimates and their full year fiscal 2017 projections by more than 10%. The stock has responded favorably, climbing more than 20% since mid-June.

Part of what has driven enthusiasm about Thor Industries' prospects is how well the company has performed recently. In its fiscal third-quarter results, Thor reached new record heights for sales and net income, which climbed 9% and 25% respectively. The motorized RV segment was the strongest for Thor, but backlog levels throughout the company rose sharply. Thor CEO Bob Martin was pleased to see the demographics of the industry shift somewhat, with younger consumers starting to look at RVs as a way to travel more cheaply. Strength in Thor's core markets makes further growth almost inevitable, and the biggest question is how Thor will respond to the opportunity.

One concern that some raised following last quarter's results was that Thor could start to have trouble meeting demand if it rises too much further. The company is starting to approach the limits of its production capacity, and Thor's towable-RV business in particular could suffer from capacity constraints. Efforts to expand existing facilities through capital investments could help, but if demand comes too quickly, Thor might not be able to respond immediately to those gains.

A big new acquisition for Thor

Yet the biggest news of the quarter came in early July, when Thor announced that it would acquire fellow RV manufacturer Jayco. The deal cost Thor $576 million in cash, but it opens up a whole new avenue for expansion for the two companies. Jayco's focus on travel trailers, camping trailers, high-end diesel Class A motorhomes, and larger Class C motorhomes complements Thor's lineup well. The move should help Thor compete more effectively against Winnebago, whose lineup has always featured larger products that appeal to certain groups of customers. Thor also saw the move as a vote of confidence in the industry's future, enabling it to deliver the features that new customers want more effectively.

Moreover, the transaction won't hit Thor Industries' balance sheet as hard as some might fear. Of the purchase price, existing cash balances covered more than $200 million, leaving about $360 million to be borrowed under a revolving line of credit. However, Thor anticipates that it should be able to pay off the credit line within three years of the deal's closing, and that should allay any concerns about Thor's having to stretch itself in order to afford the deal.

In the Thor Industries financial report, shareholders should look closely to see what impact the Jayco purchase has on its overall results. Thor expected the deal to add a month of Jayco's revenue to the fiscal fourth quarter, so it will be interesting to see how the new subsidiary affects Thor's overall results. In the long run, though, the most important thing is for the RV industry overall to see continued growth. If that happens, then Thor has put itself into even better position to go up against Winnebago and claim its share of the RV market.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Thor Industries and Winnebago Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.