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Thor has benefited from excellent management that started the company more than 25 years ago and the founders still own 36 percent of the shares outstanding. They have a track record of operational efficiency and excellent capital allocation. Thor's return on equity (ROE) has average 19.81 percent over the past 9 years with return on retained earnings of 15.15 percent. They acquire mismanaged businesses that compliment Thor's current operations and make them competitive again, taking advantage of the cyclical nature of the business to capture market share from competitors burdened by debt. Thor's shares outstanding have decreased an average of 0.7 percent per year since 2004, on top of which they have $119.6M in cash and no debt.
Having praised Thor's management, I must note that the bottom is falling out of the recreational trailer and motor home business. Predictably, high fuel prices, the credit contraction, and decreased consumer spending entering a recession-like period are hitting sales. Prices of raw materials have also increased, putting pressure on margins. Sales in the latest quarter ending April 30 declined 10.3 percent from the same period last year, with net income decreasing to $0.50 per share from $0.64 in the same quarter, 2007. The largest decline for Thor was the motor home sector, with revenue decreasing 24.2 percent and operating income falling 53 percent. In Thor's primary business of travel trailers, sales fell 8.4 percent and net income dropped 12.6 percent. Backlog fell 26.8 percent for both businesses to $276M. A strong point is the bus business in which revenue increased 1 percent and backlog grew 16.2 percent versus the same quarter last year.
Fuel prices are likely the greatest challenge to Thor. Motor homes often get around 4 mpg and have 100 gallon tanks. Do the math and the future looks grim for the motor home. Fortunately, Thor specializes in the more efficient trailers that are pulled by trucks and SUVs that get 8 mpg or better. A growing retiree demographic that is more fuel conscience but still wants to travel equals an opportunity for Thor to gain market share from debt-ridden motor home manufacturers like Fleetwood. In the short term, the lack of available credit should hinder sales. GE Finance recently terminated a partnership with Thor to provide loans for customers; combined with the general credit contraction, this results in a greater difficulty in obtaining financing.
During the last economic downturn in 2001, Thor had a decrease in net income of 26 percent and ROE fell to 12.9 percent. However, earnings doubled in 2003 and grew from $0.56 to $3.03 per share in six years. Of course, accurately predicting future sales is impossible, as they are dependent on fuel prices, consumer spending, and the price of raw materials. EV/Ebitda is currently 5.695x ttm, a discount to the historical average of about 10-11x. Ebitda would have to fall 43 percent from $206M to approx. $117M to reach an EV/Ebitda multiple of 10x. According to Yahoo Finance, the consensus 2008 earnings estimate is $1.88, falling 27 percent to $1.38 in 2009. At the recent price of $23 per share, Thor is trading at 16.7x 2009 estimated earnings, putting it in the middle of its historical trading range.
Thor is a best in class business and will continue to excel and gain market share. The challenges it faces going forward and substantial, but management's ability to allocate capital gives them an edge over their competitors. The current environment should provide opportunities for Thor to buy assets at bargain prices as they have always done. In the short term, Thor should be very sensitive to changes in oil prices and economic numbers, and this should provide buying opportunities below $20 a share for the long-term investor.
