This text is a part of an ongoing primer collection on nice and undercovered firms at engaging valuations. These items will present in-depth evaluation of enterprise fashions, financials and valuations.
THOR Industries (NYSE:THO) is the main US producer of leisure autos (RVs). The corporate was based again in 1980 and, since then, it has grown into the most important RV producer within the US and worldwide, with dominant positions each within the motorized and the towable market. After being seen as a transparent pandemic beneficiary as a result of incapability of many People to journey overseas, THOR’s inventory has abruptly fallen during the last yr. The inventory value is beneath its pre-pandemic ranges of 2019, although THOR has saved compounding worth throughout these years, being a extra helpful firm now than again then.
Earlier than going into the main points, there are some noteworthy factors to bear in mind:
- The RV business is a distinct segment, cyclical market with a steady oligopolistic construction, a protracted and constant track-record of stable worth creation for shareholders, and just about no competitors from overseas.
- The RV manufacturing course of isn’t extremely automated, so economies of scale from larger manufacturing ranges are modest at greatest. Nevertheless, dimension helps when coping with sellers and suppliers and establishing greatest practices.
- THOR has main positions each within the US towable and motorized phase, with market shares in 2022 of 42% and 49.4%, respectively. THOR additionally instructions a number one place within the European market due to the acquisition of Erwin Hymer Group (EHG) again in 2019. The European market is way more fragmented than the US one, and it may very well be a supply of future development for THOR.
- THOR has a stable steadiness sheet and a beautiful shareholder remuneration program, comprised of a rising dividend and a share buyback authorization of $450M (9% of present market cap).
- THOR’s valuation is fairly undemanding. At $90 per share, the corporate has an EV of roughly $6.3bn., which implies EV/NOA’22 and EV/NOI’22 multiples of 1.2x and 6.5x, respectively. On a levered foundation, THOR sports activities a 1.3x P/BV and a 5.3x P/E’22. On condition that THOR’s common return on internet working property (RNOA) has been round 20.6% during the last decade (ROE of 19.1%), and that it has been rising financial earnings (earnings after the price of capital) at a wholesome clip, the extent of low cost is unwarranted in my opinion. An 8% (EV) low cost fee and a 2% development fee in residual earnings, assuming a lot decrease future RNOAs (14%), would yield a goal value of $160, implying fairness returns of 13% at perpetuity.
THOR’s historical past
THOR Industries was based again in 1980 by Wade Thompson and Peter Orthwein, who acquired the Airstream division of Beatrice Meals, a poorly run conglomerate that was affected by the financial disaster of the Nineteen Seventies and was hemorrhaging cash. Airstream was shortly rotated (from a lack of $12M to a revenue of $1M after one yr of operation) and served because the platform for a lot of extra acquisitions throughout the next twenty years. The corporate was named THOR after the surnames of its two founders.
THOR IPOed in 1984, and in 2001 it closed the acquisition of Keystone, a journey trailer and fifth wheel producer that made THOR the most important producer within the US with a 25% market share on the time. In parallel, THOR constructed a bus manufacturing enterprise from scratch in the course of the Eighties and Nineteen Nineties with the acquisitions of Basic Coach, ElDorado and Champion Bus. The bus manufacturing enterprise was later offered in 2013 to a subsidiary of Forest River, as a consequence of its inferior economics versus the RV enterprise and the shortage of synergies between them.
The World Monetary Disaster was a troublesome time for the business general, however THOR’s higher economics than opponents (THOR has not posted a loss during the last three many years, which is sort of exceptional) and its debt-free steadiness sheet allowed it to purchase a number of firms throughout the next decade, growing its market share alongside the best way. Notable acquisitions have been as follows:
- 2014: Okay-Z, an Indiana-based producer, specialised in journey trailers. Okay-Z had $150M in revenues and the acquisition value was $53M.
- 2015: Cruiser RV and DRV, Indiana-based producers of towables and luxurious fifth wheel RVs, respectively. They’d $135M in revenues, and the acquisition value was $47M.
- 2015: Postle Aluminum, an Indiana-based producer of aluminium extrusions and powder coating and portray companies. The corporate had $220M in revenues, and the acquisition value was $144M. This was THOR’s first essential acquisition in parts.
- 2016: this yr was momentous for the corporate, because it acquired Jaico Corp., a producer of RV autos, from journey trailers to Class A and C motorhomes, with iconic manufacturers comparable to Starcraft RV, Highland Ridge and Entegra Coach. Jaico had $1.5bn. of revenues in 2015, EBT of $70M and the acquisition value was $576M.
- 2018: this yr noticed THOR’s largest acquisition ever, Erwin Hymer Group (EHG), one of many largest RV producers in Europe. EHG had revenues of €2.5bn and the acquisition value was €2.1bn. Transaction was closed in February ’19. The acquisition allowed THOR gaining a foothold for the primary time within the European market (second place with a 26% market share in motorhomes again then).
- 2020: Tiffin Group, a producer of luxurious RVs, with a number one presence within the luxurious Class A and C market by way of the Allegro and Wayfarer manufacturers. Tiffin was a family-owned enterprise that was based in 1972, with operations in Alabama and Mississippi. Tiffin’s revenues have been $800M in 2019 and the acquisition value was $300M. Tiffin additionally had subsidiaries that manufacture home windows, furnishings, doorways and fiberglass.
- 2021: Airxcel, a Kansas-based producer of RV merchandise comparable to rooftop air conditioners, warmth pumps, thermostats, water heaters, cooking home equipment and roofing merchandise, sealants, and coatings. Airxcel’s anticipated revenues for 2021 have been $680M (EBITDA of $86M), and the acquisition value was $750M (7.6x EBITDA). Roughly 80% of Airxcel’s revenues have been from OEM gross sales with the remaining 20% from aftermarket gross sales.
After such a string of acquisitions, it’s no surprise that THOR’s complete manufacturing volumes have elevated during the last decade, outpacing business beneficial properties, from 86k items in 2011 to 268k, the file within the firm’s historical past:
What can we find out about THOR’s acquisition technique?
First, one frequent denominator of all these acquisitions is that THOR leaves the administration group in place, working thus in a really decentralised method. Many of those companies have been non-public and family-owned, they usually see THOR as a pure pathway to monetization however on the similar time preserving the involvement within the enterprise. THOR primarily offers assist when it comes to sourcing parts and uncooked supplies, logistics, and advertising and distribution.
Second, the transactions have been carried out at engaging valuations, particularly earlier than 2018. Excluding EHG, which focuses on a unique geography, all acquisitions have made strategic sense, as they’ve levered THOR’s manufacturing, distribution, and logistics capabilities within the US. If I needed to say my solely grievance concerning the M&A coverage to this point, most likely it will be concerning the acquisition of EHG. Valuation was comparatively excessive, synergies from the deal have been small and, lastly, it’s honest to say that the European market is by some means inferior to the US one. Though the explanations are usually not extensively mentioned, I believe that the upper share of motorized items versus towables in Europe makes this market to be much less worthwhile. Though when it comes to gross margins EHG has been just like the US motorized phase (with gross margins between 10% and 14%), the US towable phase has been extra worthwhile on this regard (with gross margins between 13% and 17%). Though I’ll talk about later another essential facets of the European enterprise, it’s also value mentioning that the capital depth of the motorized phase is barely bigger than for the towable one, creating a bigger hole between the returns on capital of each segments.
Lastly, it is rather unlikely that THOR will interact in such an expansionary M&A coverage sooner or later. It already instructions excessive market shares, and extra purchases would deliver antitrust oversight. With that avenue of development closed, the 2 almost certainly avenues are additional acquisitions in different markets (particularly in Europe) and extra (however small) upstream acquisitions within the US.
Some observations on the RV business
It’s well-known that the RV business is cyclical, for the straightforward incontrovertible fact that RVs are a discretionary product with a excessive price ticket.
The business has been a beneficiary of the pandemic (work from anyplace, incapability to journey overseas, and many others.), with complete offered items of 600k in 2021, a historic file, and effectively above the 504k items offered within the earlier cycle (2017). Many of the market is comprised of towable items, which have been 531k in 2021, virtually ten occasions the variety of motorized items offered (59.7k). As portrayed within the following graph, the towable phase is way bigger than what it was earlier than the GFC, however the motorized one has not reached the height of 2004 but:
When it comes to demand, and in accordance with the RV Trade Affiliation (RVIA), RV possession has elevated 62% during the last 20 years to a file 11.2M households. A big portion of this development has been pushed by youthful generations (millennials and Gen Z), who now make up 22% of the market. RVIA estimates that 9.6M households intend to purchase an RV throughout the subsequent 5 years, with 84% of present homeowners aged 18-34 years outdated planning to purchase one other RV. Almost one-third of respondents to the RVIA survey have been first-time homeowners, demonstrating the latest pickup in RV curiosity. Though demand traits have been encouraging lately, the current funding thesis doesn’t assume a continuation of latest numbers; it’ll additionally work if general demand ranges fall again to the 400k vary per yr, given the versatile nature of THOR’s price construction throughout the cycle – for causes mentioned beneath.
It have to be talked about that different traits, comparable to ride-sharing companies (e.g., RVShares and Outdoorsy) or a rising used RV market, may maintain larger ranges of demand sooner or later, however once more, none of that is included within the valuation evaluation beneath.
When it comes to provide, the image is way clearer. As talked about above, the consolidation that occurred in the course of the 2010s has left a extremely consolidated business with rational gamers. As of the tip of 2021, THOR had a market share of 40.8% within the towable market, whereas Forest River had 36.6%, Grand Design 10%, and the remainder of the gamers lower than 2% every. Within the motorized market, the focus is even larger (for causes defined beneath), with THOR controlling 47.7%, Forest River at 18.2%, and Winnebago at 19.7%.
It’s value remembering that Forest River has been managed by Berkshire Hathaway for 17 years, which is little doubt a rational competitor (if Forest River doesn’t discover compelling funding alternatives it sends the money as much as Omaha) and offers some validation that business economics are good. As THOR talked about in its 2Q’22 outcomes, THOR has not elected to chase additional market share, being extra centered on margins.
In any case, the RV business has been fairly worthwhile over the financial cycle. What are the principle causes behind the profitability of the business? I’d point out the next factors:
- In contrast to the manufacturing course of within the gentle car business, the RV manufacturing course of has at all times been way more guide, for 2 causes. First, RV OEMs make many little modifications to their merchandise yearly, as the necessity for differentiation is excessive, and general business manufacturing volumes are a lot decrease than within the auto business. Second, RV OEMs have stayed away from automation as a result of cyclical nature of the enterprise and the necessity to preserve the fastened a part of the associated fee construction as small as potential as a way to survive in a downturn.
- The excessive diploma of guide processes implies that for the OEMs there’s little incentive to consolidate their numerous manufacturers: price benefits from effectivity could be low. Totally different manufacturers are offered in numerous states, the merchandise are typically totally different throughout manufacturers (interesting to the particularities of a sure area), and the connection with sellers is typically based mostly on model exclusivity.
- The motorized and towable segments are totally different, not solely when it comes to the ultimate consumer and value factors (motorized items being way more costly), but in addition of their economics. Towables are comparatively simpler to penetrate by potential new opponents. Motorized items are tougher, when it comes to engineering design and the necessity to have “deep pockets” to finance the totally different elements.
- Relationships are one of the vital essential (and infrequently underappreciated) obstacles to entry into the business, being the results of how localised the manufacturing is. Round 80% of the RVs manufactured in North America come from Indiana. RV suppliers are additionally primarily situated in Indiana given the just-in-time inventories with which the OEMs function. From a value perspective, and given how guide the manufacturing course of is, you will need to do not forget that Indiana additionally has decrease dwelling prices versus the remainder of the US.
- Because the EHG acquisition, THOR additionally has publicity to the European market, which has its personal particularities. The important thing distinction is that the US market is dominated by trailers, whereas the European one has historically been a motorized market (as a consequence of historic causes, but in addition as a consequence of visitors restrictions in city areas). Trailers often command larger gross income, and due to this fact THOR’s general US enterprise delivers higher gross margins than the European one. The principle purpose for this distinction in profitability lies within the worth of the chassis, which is larger in a motorized unit, and the worth goes to the OEM on condition that it offers “extra items”.
After being seen as a transparent pandemic beneficiary as a result of incapability of many People to journey overseas, THOR’s inventory has fallen as a consequence of considerations concerning the financial cycle, oil costs, and the final market disdain for Covid winners. The inventory value is again to its pre-pandemic ranges of 2019, though THOR has saved compounding worth throughout these years, as I’ve proven within the historical past part.
THOR’s historic monetary statements are introduced intimately on the finish of the article. I’ve additionally reorganised the accounts to provide a transparent view of the working and monetary actions. With the intention to body the inputs of the valuation, the next desk provides a pleasant sketch of what the corporate has delivered since 2011:
From 2011 till 2022, THOR has grown revenues at 18% CAGR, whereas internet working property have been rising at 21%. Though revenues have been drastically helped by the numerous acquisitions described above, it’s reassuring to see that NOAs have grown broadly in line, suggesting that THOR has not overpaid for its acquisitions (with the potential exception of EHG) and that the turnover of the enterprise has remained largely steady. Total, the corporate has earned a mean RNOA of 20.6% since 2011, pushed by a 4.8% margin and an asset turnover of 4.2x.
As I discussed above, it’s value repeating that the enterprise has delivered constant returns on capital over time regardless of its obvious cyclicality. Apart from 2019, which noticed a downturn within the RV business, THOR has generated optimistic returns above its price of capital (assuming an 8% threshold fee) during the last decade. On prime of that, the stream of financial income has additionally saved rising as extra capital has been deployed into the enterprise by way of acquisitions:
These metrics can provide us a valuation vary for the enterprise. For an (EV) low cost fee of 8%, a development fee in residual earnings of two%, and a return on internet working property of 14% (or $300M of financial income yearly) on its asset base of $5bn., the EV could be round $10.1bn., implying an 80% upside, or $160 per share. At that value, THOR would commerce at 2x EV/NOA and 14.4x EV/NOI. It have to be careworn that I regard a 14% fee of return as a really conservative assumption over the long run, given THOR’s observe file, the maturity of the business and the traits mentioned above.
However, if we assume financial income of $200M (the typical from 2017 to 2021), the goal value would drop to $130 per share – which implies that the margin of security is ample:
There’s one other helpful solution to body the present valuation low cost: when it comes to inside charges of return. Given the present EV of $6.3bn. (EV/NOA of 1.2x), and assuming that our ahead RNOAs are appropriate (12% for the bear case, 15% for the bottom case, and 18% for the bull case), future unlevered returns will annualise 10%, 11.6%, and 14%, respectively; which after bearing in mind the modest leverage of the corporate, will rise to 11%, 13%, and 16%, providing thus sturdy return prospects for long-term buyers:
Different qualitative issues
Relating to capital allocation, you will need to point out that THOR’s administration group has a long-term method when managing the enterprise. Traditionally, the enterprise ran with little or no debt, as one of many founding companions didn’t just like the dangers that debt dropped at this enterprise. Not too long ago, as a result of acquisitions of EHG and Airxcel the corporate has some debt on its steadiness sheet, however administration has guided to a leverage ratio of lower than 1x EBITDA for the foreseeable future – they nonetheless must some extent a no-debt mentality. However, they’re dedicated to a rising dividend and to opportunistic share buybacks: they authorized a $450M authorization lately, 9% of the present market cap.
Peter Orthwein continues to be a major shareholder with a 3.5% stake (he’s additionally Chairman Emeritus), however sadly, the administration group doesn’t personal a major stake within the enterprise. Compensation is generally variable and largely linked to the evolution of the next basket: income earlier than tax, ROIC, and FCF. Lastly, it’s value mentioning that the corporate doesn’t conduct quarterly convention calls, however moderately depends on a Q&A doc revealed along with the outcomes, a fairly heterodox means to offer data contemplating the requirements of most listed firms. I view this fashion of speaking ends in a extremely beneficial means, and which has coincidentally been utilized by another extraordinary firms (Expeditors Worldwide of Washington involves thoughts).
Draw back dangers
- The RV-component business has change into more and more consolidated over time, thanks primarily to the efforts of LCI and Patrick Industries. Though the connection between the OEMs and their suppliers could be very shut and has been good to this point, additional consolidation may erode THOR’s bargaining place.
- The supplier house is extremely fragmented for the time being, however there’s a wave of consolidation occurring (led by RV Retailer and Tenting World), which may affect THOR’s negotiating leverage over the long run.
- On a longer-term foundation, the rise of autonomous autos might deliver curiosity (and potential competitors) from auto OEMs into the RV sector, as individuals might want bigger autos when taking longer journeys (which, I’d argue, might be extra frequent, given the comfort of autonomous driving).
- The financial cycle isn’t as dangerous as it’s feared.
- Future share repurchases are carried out at present or extra engaging ranges.
- THOR makes additional strikes to consolidate the European business at engaging valuations.
- Further upstream acquisitions (i.e., parts) at engaging valuations.
Appendix I: THOR Industries reorganised monetary statements (2010-2022)
Reorganised earnings assertion
Reorganised steadiness sheet
 In response to THOR, used RV gross sales are a complement to the brand new RV market because the used-RV purchaser usually follows the identical historic 3- to 5-year trade-in, trade-up cycle, including to potential new RV gross sales within the long-term. However, there’s a wholesome proportion of potential patrons preferring making an attempt earlier than shopping for.
 Again in 2012, THOR’s market share in trailers was 38% and 21% in motorhomes. See THOR’s 10K’12, p.6.
 EV/NOA: Enterprise worth to internet working property. EV/NOI: Enterprise worth to internet working earnings. Internet working property are computed as fairness (together with minority pursuits) plus internet monetary debt. Internet working earnings is computed as EBIT after statutory taxes, much less different complete earnings working objects (comparable to foreign money translation changes). EV/NOA and EV/NOI, are, in impact, the unlevered measures of P/BV, and P/E, respectively.
 Return on internet working property (RNOA): internet working earnings divided by internet working property.