Investor Essentials Daily

Everyone but the rating agencies can see that business is booming for Thor with the 2020 RV renaissance

Thor Industries, Inc. (THO)
September 22, 2021

Despite what some say, the “At-Home Revolution” isn’t going anywhere. 

But if you want to go somewhere, avoid the airports, and maintain your homelike setting, the RV business may have a solution you’d love. 

However, they won’t hesitate to make you pay, because RV demand is through the roof. And yet, the credit rating agencies have completely missed the mark. Read on for a detailed look at one of the country’s most important RV companies. 

Also below, the company’s Uniform Accounting Performance and Valuation Tearsheet.

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Those who’ve been subscribed to Investor Essentials Daily throughout the pandemic know that the “At-Home Revolution” has been one of the most profound and long-lasting themes over the past 18 months.

As seemingly never-ending waves of the pandemic have slammed the door shut on public gatherings as we once knew them, people found themselves investing in their at-home lives. Business has been booming for the companies that enable this.

This includes everything between the networking companies that enable at-home work, to at-home exercise companies, to tiny builders of high-fidelity stereo amplifiers, to the sellers of niche furniture like bay window cushions. 

Pundits frequently declare that the time has come to look past the At-Home Revolution. But each time they do, new data comes out demonstrating the sustainability of the trend. People are still concerned about the pandemic. They are still investing in their at-home lives.

For example, recent data shows that business confidence among renovation professionals is at an all time high amid surging demand for home improvement. 

And even once the virus abates, the step-change in how people view the role of their homes may sustain for years, if not decades, to come. 

Another well-publicized pandemic trend has been the global cancellation of travel, which has always been a significant portion of Americans’ leisure spending. 

It is then no surprise that the industry that captures both of the at-home revolution and Americans’ desire to get travelling again has done well over the past year.

That is the world of RV’s: homes you can travel in. 

Anyone who tries to buy an RV today will either need to pay sky-high prices for a used example, or wait over a year for a new one to get built. That’s because RV companies have built up multibillion dollar backlogs amid the surging demand, and anyone who orders new needs to wait in line. 

Let’s look at one of the most important RV builders: Thor Industries, which owns influential RV brands like Airstream, Jayco, and Entegra. 

As RVs sell for tens of thousands of dollars more than they did pre-pandemic, Thor has been pocketing cash like never before. Moreover, the company’s $14 billion backlog gives management fantastic visibility into future cash flows.

This is crucial when trying to understand the sustainability of a company’s debts. However, the major credit rating agency S&P rates the company as a BB, implying there is a 10% chance the firm will go bankrupt in the next 5 years. 

By using the Valens Credit Cash Flow Prime (CCFP) tool, we can put S&P’s rating to the test. 

The CCFP leverages the full power of Uniform accounting to both correct for distorted financial reporting caused by inconsistent GAAP standards, and also compare future cash flows to future obligations. 

In the chart below, the blue dots represent the cash available to the company, while the blue line represents Uniform earnings. The bars represent the set of obligations the Company must pay off in each subsequent year, with the most easily divertible obligations like maintenance capex stacked towards the top, and unbreakable contractual obligations like debt maturities sitting near the bottom.

When looking at the CCFP, we can see that the company’s cash position will continue to build while earnings hold steady. In all forward years except 2026, profits alone will be enough to cover obligations. By the time Thor needs to pay back its major debt maturities in 2026, it’s cash position will have built to a point where paying the debt down will be of no consequence. See for yourself:

With ample liquidity and great visibility into future business conditions, S&P’s rating misses the mark. Massive at-home revolution tailwinds have built this company a safety net that most can only dream of.

This is why we don’t rate the company as highly speculative, as S&P does. Thor Industries earns an IG3+ Valens credit grade, implying there is a sub-2% chance of default in the next 5 years.

In these weekly credit-focused editions of Investor Essentials Daily, we try to give you a detailed glimpse of how we think about fixed income investing. 

Our conviction credit list, however, goes a step farther. We use the CCFP along with other signals to find the specific bonds that are most inaccurately priced based on their issuers’ actual abilities to pay their obligations. To see how you can use this information to get ahead of the bond market, click here.

SUMMARY and Thor Industries, Inc. Tearsheet

As the Uniform Accounting tearsheet for Thor Industries, Inc. (THO:USA) highlights, the Uniform P/E trades at 10.0x, which is below the global corporate average of 24.3x, but around its historical average of 11.3x. 

Low P/Es require low EPS growth to sustain them. In the case of Thor Industries, the company has recently shown a 3% Uniform EPS decline.

Wall Street analysts provide stock and valuation recommendations that in general provide very poor guidance or insight. However, Wall Street analysts’ near-term earnings forecasts tend to have relevant information.

We take Wall Street forecasts for GAAP earnings and convert them to Uniform earnings forecasts. When we do this, Thor Industries’ Wall Street analyst-driven forecast is an 88% and 8% EPS growth in 2021 and 2022, respectively.

Based on the current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Thor Industries’ $110 stock price. These are often referred to as market embedded expectations. 

The company is currently being valued as if Uniform earnings were to shrink by 6% over the next three years. What Wall Street analysts expect for Thor Industries’ earnings growth is above what the current stock market valuation requires in 2021 and 2022.

Furthermore, the company’s earning power is 4x the long-run corporate average. Moreover, cash flows and cash on hand are 4x its total obligations—including debt maturities, capex maintenance, and dividend. Together, this signals low dividend and credit risk.

To conclude, Thor Industries’ Uniform earnings growth is below its peer averages but the company is trading above peer valuations. 

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research