Thor Industries: In It For The Long Haul

THOR Airstream

My goal as an income investor is to create a portfolio of investments that generate reliable and compounding cash flow to grow my net worth and fund my eventual retirement before I turn 56, the age my Dad retired. I’ve deployed a strategy of multiple streams of income including real estatepeer lending and dividend growth stocks to reach my goal. My dividend stocks reside in a taxable brokerage account, various dividend reinvestment plans (DRIPs), and in a no-fee dollar cost average account.

In a recent blog post, I identified six debt-free dividend growth stocks that caught my attention, beyond just being debt-free. One of those stocks, Thor Industries (THO) seemed to be a compelling investment prospect. Since the article, I’ve had the stock on my watch list.

On June 4th, the company reported earnings that disappointed short-term investors. Down 6% the next day, I decided to open a starter position in the company. I bought 20 shares at $58.05. The purchase adds $21.60 to my forward 12-month dividend income. For now, this is a 1/3 to 1/4 position that I plan to add to in the future.

This is the 41st stock in my taxable dividend growth portfolio. Click here to see all of my holdings.

Thor Industries Company Profile

Thor Industries is an Elkhart, Indiana based company that manufactures a wide range of towable and motorized recreational vehicles (RVs) for the North American markets. It was founded in 1980 when Wade Thompson and Peter Orthwein bought Airstream which was ailing from the economic weakness of the 1970s. The name Thor was taken from the first two letters in each founder’s last name.

Thor operates under a decentralized business model, meaning each operating entity does business independently under the Thor Industries umbrella. This structure allows each entity to remain entrepreneurial and stay close to its customers and dealers. The company has grown its RV portfolio over the years through numerous acquisitions.

The 12 operating subsidiaries include Airstream, Bison Coach, Crossroads RV, Cruiser RV, DRV Luxury Suites, Dutchman, Heartland RV, KZ, Keystone RV Company, Livin Lite RVs, Thor Motor Coach, and Postle Aluminum. They offer RVs under dozens of brand names.

From Yahoo Finance:

The company offers travel trailers under the trade names of Airstream International, Classic Limited, Sport, Flying Cloud, Land Yacht, and Eddie Bauer; Interstate and Autobahn Class B motorhomes; conventional travel trailers and fifth wheels under the trade names of Cruiser, Rushmore, Zinger, Elevation, ReZerve, Sunset Trail, Montana, Springdale, Hornet, Sprinter, Outback, Laredo, Alpine, Bullet, Fuzion, Raptor, Passport, Cougar, Coleman, Kodiak, Aspen Trail, Voltage, Landmark, Bighorn, Sundance, Elk Ridge, Trail Runner, Cyclone, Prowler, Wilderness, Sportsmen, Vision, Spree, MXT, Durango, SportTrek, and Sonic; and luxury fifth wheels under the name of Redwood. It also manufactures and sells gasoline and diesel Class A and Class C motorhomes under the Four Winds, Hurricane, Windsport, Chateau, Daybreak, Challenger, Tuscany, Outlaw, Palazzo, Axis, Vegas, and A.C.E. trade names; lightweight travel trailers, fifth wheels, and specialty products under the Camplite, Quicksilver, Bearcat, and Axxess trade names; and equestrian recreational vehicle products with living quarters under the Trail Hand, Trail Express, Stratus, and Stratus Express trade names.

The latest acquisition announced in May, Postle Aluminum, is a long-time material supplier to the RV industry. 75% of their sales were to the RV industry, including 30% of sales to Thor Industries and its subsidies. Thor Industries has used cash on hand to make acquisitions, increasing its future cash flows without bloating shares outstanding or adding debt.

Thor Industries is the number two overall RV market leader with 34% market share. The top three manufactures of RVs make up nearly 82% of retail sales. Thor Industries employs approximately 9,400 employees, and operates 120 facilities in the United States. Major competitors include, Winnebago Industries (WGO), Drew Industries (DW), and Forest River (a subsidiary of Berkshire Hathaway (BRK-B).

The company presents itself as a conservatively run, no nonsense operator in its investor literature. Reading through the most recent investor presentation, I was entertained by the straight-talking tone. Some of the gems in the presentation include:

  • Our focus requires that we make decisions based on the long-term success of our Company.
  • Growth is important, but this is a business of relationships, and we realize that the key to long term sustainable sales growth rests in the strength of our relationships with consumers, dealers and suppliers.
  • No ivory tower: approximately 9,400 employees, only 42 in corporate staff
  • No golden parachutes
  • No ‘pro forma’ earnings. We report net income, not adjusted earnings to cover up performance
  • Decision making driven by the needs of the customer
  • Profitable every year since our founding in 1980; 34 years of profitability

Recent Earnings and Buyback

On June 4th, the company announced its third quarter 2015 earnings. Revenue came in at $1.17 billion, up 12% year-over-year. Earnings per share (EPS) for the third quarter was $1.19, up 16% from the third quarter in the previous year, but $.02 shy of analyst estimates.

CEO Bob Martin’s mention of softness in the near-term for higher-end models, plus a shift in order patterns, contributed to a 6% sell-off in the stock price the day after the announcement. But performance was solid, and in the press release Martin adds:

Despite these factors, we see many reasons for optimism for the future of the RV industry and Thor.  The continued entrance of baby boomers into the core RV buying age group as well as the rapid growth of younger buyers entering the RV market provide a solid foundation for long-term growth.

In May, Thor Industries announced a repurchase agreement to buy back one million shares for $60 per share in a private transaction with a family foundation. The number of shares outstanding is now 52.39 million. Institutional ownership is 87%.

Fundamentals

I don’t own an RV or aspire to own one in retirement. The thought of buying stock in this company was far from my mind when I first started researching Thor Industries. However, the debt-free balance sheet and impressive fundamentals made this stock hard to ignore.

Thor Industries has a market capitalization of $3 billion with nearly $260 million of cash on hand and $0.00 debt on the balance sheet. Its current trailing 12-month (ttm) PE ratio is 15.60. The forward PE (FYE Jul 31, 2016) is 12.78, based on earnings estimates of 4.50 per share for FY 2016. Current FY 2015 estimates are for 3.81 per share, suggesting year-over-year earnings growth of 18%. Analysts estimate five-year forward earnings growth of 20% annually (source Yahoo Finance).

The five-year expected PEG ratio is 0.77, suggesting the company is undervalued from an estimated earnings growth perspective.

Thor Industries pays an annual dividend of 1.08 per share, yielding 1.80%. This compares to a five-year average dividend yield of 1.6%. The current dividend payout ratio is 28%.

Here’s a ten-year chart:

thor industries

Due to the cyclical nature of the RV industry, Thor’s revenue and stock price were severely impacted by the 2008-2009 financial crisis and recession. However, despite a 50% drop in revenue from 2006 to 2009, the company still managed to squeeze out a profit every year, and continued to pay shareholders a dividend, including a $.50 per share special dividend in October of 2009. In fact, Thor has a strong history of special dividends and dividend growth.

Dividend History and Growth

Thor Industries has paid a dividend every quarter since 1988. For many years after, the dividend remained flat. Since 2003, however, the company has been aggressive with increases and special dividends. Increases have become more regular in the last five years, recently joining the dripinvesting.org Dividend Challengers list. However, that list does not account for special dividends.

Excluding special dividends, the five-year and ten-year regular dividend growth rates (DGRs) are 28% and 25% respectively. The ten-year DGR is impressive despite a lack of increases during the tumultuous market years of 2007, 2008 and 2009.

With earnings expected to grow at 20% over the next five years, a low dividend payout ratio of 28%, and a history of special dividends and returning capital through repurchases, the future for dividend payments and increases looks bright.

The graphic below shows a 12-year history of regular and special dividends.

Thor industries Dividend History

Data source: Yahoo Finance

Outlook

In the most recent investor presentation, management lays out some positive long-term trends as identified by Kampgrounds of America.

  • Baby Boomers (a prime RV target market for many years) represent 24% of the population. While
    we are focused on meeting the need of Boomers, we are also looking to the future and developing
    products to meet the needs of Generation X and Millennials as they seek more active outdoor
    experiences with their families.
  • Approximately 46.2 million households in North America are active campers, but only 9.7 million, or 21% of them, are RV campers. The remaining campers primarily use tents or cabins, which makes them a solid target market for the RV industry (58% of RV owners started as tent campers).
  • Increasingly diverse potential customer base – Hispanic, African American, Asian and other ethnicities accounted for 23% of campers in the 2014 survey compared with 12% in 2012.

Risks

The biggest risk to company sales is another economic downturn. Consumers don’t make large recreational purchases in a bad jobs market or when confidence is low. However, recessions often lead to lower interest rates which eventually encourages larger scale purchases.

Low interest rates have likely contributed to the success of the company over the past five years. Therefore, a rising interest rate environment that increases borrowing costs for consumers, may slow sales. If rates increase at a moderate rate over time, the RV industry should be able to absorb the change.

Aluminum prices and component costs are always a variable to consider. The strengthening dollar should help Thor Industries because its sales take place in North America. The strong dollar should increase buying power overseas, lowering the overall cost of production. The recent purchase of Postle Aluminum is a welcome asset for helping to control manufacturing costs.

Conclusion

Thor Industries managed to survive the worst economic recession since the 1930’s depression without an annual loss, and without cutting the dividend. By maintaining a zero debt balance sheet and healthy cash flow, the company is able to weather various economic conditions and make strategic cash purchases to help grow the company. Thor’s entrepreneurial spirit and decentralized structure allows them to be nimble and adjust to the customer’s demands while maintaining strong relationships with dealers.

The business, fundamentals and dividend growth potential appear sound at this time, while the valuation has dipped due to short-term investors exiting based on one quarter’s missed estimates. In my view, now may be a great opportunity to buy this all-American company. I’m in this one for the long haul.

Disclosure: Long THO, BRK-B

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4 Responses to Thor Industries: In It For The Long Haul

  1. FerdiS June 17, 2015 at 10:28 am #

    That’s an interesting buy! Thanks for sharing… I’ll need to take a look at THO!

  2. Dividend Empire June 17, 2015 at 10:58 am #

    Thanks for the analysis! Thor is always near the top of my monthly screen for quality dividend growth stocks. I just haven’t had the chance to research it yet. I’ll most likely join you as a shareholder in the near future.

    Ken

  3. DivGuy June 30, 2015 at 12:30 pm #

    As a future RV-tripper, I should look into that one closely! 😉 Just got back from a few days in our RV! Thank you for sharing that one.

    Cheers,

    Mike

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