Thor Industries (THO), one of the world's largest manufacturers of recreational vehicles (RVs), is trading sharply higher (+12%) today after reporting strong 3Q17 (Apr) earnings last night.
Thor makes a wide variety of RVs sold primarily throughout the US and Canada. There are two major types of RVs: towables (non-motorized) and motorized. For Thor, it has much higher exposure to the towables segment of the market as about 70% of its revenue comes from towables and approximately 27% comes from motorized.
The principal types of towable RVs that Thor produces include conventional travel trailers and fifth wheels. Not to get too granular, but there are differences. A fifth wheel has a raised forward section that is attached to a receiver in the bed area of the pickup truck. Fifth wheels are usually a bit heavier, longer and taller. It must be towed by a pickup truck as the hitch is directly over the rear axle of the pickup truck. This allows for better stability and handling when driving. It's also much easier to back up. A conventional travel trailer is typically smaller and it hitches to the back of the pickup truck or SUV, well behind the rear axle, which results in more sway during driving but it's manageable.
A motorhome is a self-powered vehicle built on a motor vehicle chassis. Motorhomes are self-contained with their own lighting, heating, cooking, refrigeration, sewage holding and water storage facilities etc. Class A motorhomes, generally constructed on medium-duty truck chassis, are supplied complete with engine and drivetrain components by motor vehicle manufacturers such as Ford and Freightliner. Thor designs and installs the living area and driver's compartment of Class A motorhomes. It also makes Class C and Class B motorhomes, which are smaller.
The company owns a number of brands. Some of its larger brands include: Airstream, which makes premium quality travel trailers and motorhomes. Airstream may be the most recognized RV brand in the industry. Another major brand is Jayco (acquired in July 2016). Thor also owns CrossRoads, which makes conventional travel trailers and fifth wheels under trade names such as Sequoia, Cameo, Elevation, Cruiser. Another major brand is Thor Motor, which makes gasoline and diesel Class A and Class C motorhomes. Its products are sold under trade names such as Four Winds, Hurricane, Windsport, Chateau etc. Keystone is another large brand. It focuses on conventional travel trailers and fifth wheels under trade names such as Montana, Springdale, Hideout etc.
Of note, Thor made a large acquisition in July 2016 when it bought Jayco Corp. for approximately $576 mln in cash. Jayco brings complementary products in travel trailers, folding camping trailers, higher-end diesel Class A motorhomes and larger Class C motorhomes. Jayco posted revenue of $1.5 bln in calendar 2015, so it was a large deal for Thor.
Turning to the AprQ earnings report, EPS rose 42% YoY to $2.11, which was much better than market expectations. Revenue rose 56.9% year/year (a good chunk of this is the Jayco acquisition) to $2.02 bln, which also was better than expected. The company did not provide specific guidance, which is usually the case. This is a thin margin business and Thor did see some margin compression in the quarter as gross margin declined to 14.6% from 15.7% in the prior year period. A decline was expected due primarily to acquisition-related dilution and market-driven changes in product mix.
Breaking it down by segment, Towable RV sales were $1.43 bln, up 52.6% YoY, driven primarily by revenue from the Jayco acquisition. Excluding Jayco, growth would have been a still healthy +13.8% YoY, driven by strength in smaller, more affordably priced travel trailers. Motorized RV sales were $549.9 mln, up 79% YoY. The sharp increase was partly from Jayco and partly from robust growth in THO's more moderately priced gas Class A and Class C motorhomes, which have been in high demand by dealers and end consumers.
THO says it continues to see strength in the RV market, as dealers and consumers remain optimistic. RVs are popular as consumer can enjoy family and friend time while experiencing the many great outdoor spaces in North America at an affordable price point for the average family. Also, consumers continue to find new uses for RVs: from youth sports and tailgating, to festivals and concerts, they are able to enjoy their RVs over a longer season than many other recreation alternatives. All of these factors are driving the growing demand for Thor's products.
With the surging popularity of RVs, and the RV lifestyle in general, Thor says it has seen a significant increase in demand, particularly for affordable travel trailers and motorhomes. As a result, Thor is increasing its production capacity with new plants or expansion projects at nearly every Thor subsidiary.
In sum, this was a another good quarter for Thor. The company is doing a good job in terms of bringing in new customers. A lot of this is being done by focusing more on more affordably priced travel trailers. This is driving sales growth but the downside is that margins take a bit of a hit as you can see this quarter. However, over time, Thor thinks that this short-term trend for cheaper RVs will translate into longer term demand for higher priced units as customers adopt the RV lifestyle and eventually trade up from entry-level units to mid-level and even high-end units. With all of that said, while THO had an impressive AprQ, Briefing.com is a bit concerned that as interest rates rise in 2017-2018 (a June rate hike is expected), this could dampen sales as these are big ticket items. However, demand seems robust in the near term at least. On a final note, keep an eye on other RV stocks: WGO, PATK, CWH.