Overview: Thor Industries, Inc. (NYSE:THO) was founded in 1980 and has grown to become the largest manufacturer of Recreational Vehicle (RV) in the world. Thor operates Towable Recreational Vehicles segment which includes travel trailers, fifth wheels and specialty trailers, and Motorized Recreational Vehicles segment which includes Class A, B and C motorhomes. Towable RV accounts for ~¾ of Thor’s total revenues while Motorized RV accounts for ¼. Thor has No.1 market share in both segments, with combined U.S. and Canadian market share of approximately 50.7% for travel trailers and fifth wheels combined, and approximately 39.6% for motorhomes. Thor operates ~200 facilities located in Indiana, Michigan, Idaho, Ohio and Oregon, and has its products sold through independent retail distributors primarily in the U.S. and Canada.
Robust Industry Fundamentals: The RV industry is in an era of unprecedented growth and is poised to record an eighth consecutive year of shipment gains in 2017. This robust growth is mainly due to product innovations that appeal to retiring baby-boomers, the bread and butter of the RV population as well as younger buyers. RV’s popularity has been growing, as more younger buyers are entering the RV market for the first time. In addition, RVs are being used for new applications, such as tailgating, dog and craft shows, or a simple weekend getaway. Separately, domestic travel offers fewer risks than international travel at a more compelling value, and low fuel prices make RV travel increasingly attractive and more affordable for consumers nowadays. Lastly, consumer confidence remains very strong, and pricing and promotional levels in the RV industry has been stable.
Healthy Growth Prospect: According to the Recreation Vehicle Industry Association (RVIA), the RV industry’s shipments will reach 472,200 units in 2017, ~10% increase from the number shipped in calendar 2016, the highest since the 1970s. RVIA also projects that RV shipments will reach even greater heights in 2018, with wholesale production projected at 487,200 units. Thor is growing faster than the industry, due to the positive reception by dealers and consumers of the products it introduced over the past year, particularly the more affordably priced travel trailers and motorhomes. At the end of FY17, Thor’s backlogs nearly doubled to $2.33 billion from a year ago. The adoption of the RV lifestyle by a younger demographic, will likely continue to contribute to the overall growth in the RV industry for years to come, and in particular help Thor to grow as the company has a dominant position in the entry level vehicles. To accommodate the robust demand for RVs, Thor has expanded its production capacity significantly in FY17, including expansion projects at Keystone, Jayco and Heartland, which will continue to ramp up in FY18. Those investments will position Thor well for long-term growth.
Strong Operational Record: From FY12 to FY17, Thor’s revenue grew 22.4% CAGR while net income grew 27.4% CAGR. In its FY17 which ended on July 31 of 2017, organic revenue growth was strong at 16%, while earnings grew 45% over 2016. There are plenty of opportunities for Thor to grow earnings even faster, as its FY17 profit margin was dragged down by its FY16 acquisition of Jayco, whose margin was only 2/3 of Thor’s level. Jayco’s margin will steadily improve, however, as Thor generates cost synergies in back-office functions, such as legal, insurance and employee benefits in the near term. Over the longer term, Thor will provide assistance to help Jayco attain continuous improvement in all aspects of its operations, such as having a flatter structure and become more nimble and responsive to the market place.
Asset “Light” Business Model: Unlike other capital intensive vehicle production industries, RV production facilities are typically smaller, between 70,000 and 90,000 square feet, with an average cost in the range of $3 M to $6 M. With this modest investment, Thor can usually achieve a rapid payback on its capital. Thor also typically builds plants with a degree of flexibility so it can shift production to a variety of products depending on demand fundamentals. More importantly, Thor focuses primarily on assembly, not manufacturing, so it can maintain even more flexibility and profitability operating in a cyclical industry. In addition to being prudent about capital investment, management is also very conscious about maintaining a strong balance sheet, and would only leverage when it makes sense. The company borrowed $360 M in 2016 to finance its $576 M purchase of Jayco. Since then, the company has quickly reduced the debt to $145 M.
Catalyst: Thor hosted its 8th annual Dealer Open House on September 18-21, 2017 in Indiana, which drew record attendance and record orders. Dealers are highly optimistic about the remainder of 2017 and calendar 2018. We believe 2018 will be another record year for Thor, and the company will continue to post strong operational results in the foreseeable future. Separately, the three hurricanes – Harvey, Irma, and Maria, have caused many people to dislocate. RV, together with motels and apartment rentals will be used to house many of those people for months and possibly years to come during the rebuilding process. Though sales as a result of the hurricane relief efforts are small so far, according to management, we believe Thor is well positioned to meet any future FEMA orders as the company offers many lower priced models which tend to suit FEMA’s interest. Any hurricane housing related demand would be gravy to Thor’s already strong fundamentals.