Thor Industries‘ (NYSE: THO) fiscal 2018 third-quarter earnings, released on June 6, helped stem some of the company’s recent share price decline: After surging nearly 51% in 2017, Thor’s shares have lost one-third of their value year to date. As my colleague Dan Caplinger recently pointed out, the recreational vehicle, or RV, market remains strong, but investors are concerned about Thor’s near-term prospects, given that it’s coming off a period of phenomenal revenue growth. Below, I’ll analyze five points made in Thor’s earnings release and most recent quarterly “questions and answers” document, which provide context around its current earnings and outlook.
A lower growth rate is due to a difficult comparison
Thor reported record revenue in the third quarter of $2.25 billion, an increase of 11.7% over the prior-year quarter. Yet this rate of expansion trailed behind the first and second quarters of 2018, which exhibited year-over-year growth rates of 30.6% and 24.1%, respectively. It also pales against the top-line growth rate of nearly 57% achieved in the prior year’s third quarter.
Management explained that capacity improvements have enabled Thor to ship more units in the first and second quarters of 2018, and that dealers placed a flurry of orders in the first half of the fiscal year in advance of the spring selling season.
The company also noted that last year’s third quarter was the highest in Thor’s history, so the nearly 12% incremental advance in Q3 2018 represents credible progress. To this I’ll add that last year’s third-quarter leap also included acquisition revenue from Thor’s purchase of RV manufacturer Jayco, which was completed in July 2016. Jayco contributed 40 out of 57 percentage points of top-line growth in the third quarter of 2017. Now that the Jayco impact will soon get “lapped,” incremental revenue progress should be acceptable to shareholders.
The state of the backlog
In the third quarter, Thor’s towable RV segment backlog declined 16.6% to $1.3 billion, while backlog in the company’s second major segment, motorized RVs, dipped 12.2% to $698.3 million. In total, the manufacturer reduced its backlog by roughly 18% to $2 billion over the last three months.
Management attributed the smaller queue of unfilled orders to the ongoing production capacity expansion investments that Thor has initiated over the last 21 months. Additionally, the company relayed that it hasn’t seen a material change in cancellations versus last year (i.e. the backlog isn’t getting trimmed by dint of withdrawn orders).
While a rising backlog shores up investor confidence over the direction of future revenue, a shrinking backlog isn’t necessarily a warning sign. If you’d like more detail on the state of the company’s productivity improvements, I wrote an analysis on Thor’s backlog in April, which explains the interplay between unfilled orders and investors’ perceptions.
The skinny on higher dealer inventories
Like backlog, inventory held by independent RV dealers can serve as a gauge of Thor’s business health. In the current quarter, dealer inventories rose nearly 31%. Could this be a sign that the company’s vehicles are selling at a slower pace?
According to management, the sharp uptake in dealer inventories is due to four factors. First, as mentioned above, dealers purchased more inventory to have adequate vehicles on hand for the spring selling season. Second, a long winter delayed the start of the spring season, leading to higher vehicle buildup in some geographical regions. Third, the improved production capacity allowed Thor to reduce lag time between orders and speed delivery to dealer lots. Finally, an improving Canadian economy has caused Canadian dealers to bulk up their lot inventories.
The factors listed above are supported by management’s assertion that the average age of units on dealer lots has decreased slightly over the prior year, indicating steady turnover of older inventory even as new units arrive at dealerships.
The effect of steel and aluminum tariffs
Thor Industries hasn’t quantified the effects of tariffs imposed on imported steel and aluminum by the Trump administration earlier this year in a detailed manner. However, management did attribute some of the company’s 50 basis point decline in year-over-year gross margin (from 14.6% to 14.1%), to cost increases given an uncertain environment. This quote from Thor’s question and answer document provides a succinct, if qualitative, description of the current impact, “In addition, while labor costs have moderated, we are experiencing inflationary price increases in certain raw material and commodity based components due in large part to the headwinds created by the announcement and implementation of the steel and aluminum tariffs and other regulatory actions.”
While investors likely wish the company’s outlook contained a little less ambiguity vis-a-vis steel and aluminum costs, they may have to wait a few quarters before the effects can be properly measured. Thor did disclose that the motorized segment, which is responsible for roughly 27% of total revenue, utilizes more aluminum and steel versus the larger towable segment.
Don’t expect huge percentage growth in revenue next quarter
Going into the last quarter of the fiscal year, management offered the following cautionary note in Thor’s earnings release: “…we will be facing tougher year-over-year comparatives on both the top line and pre-tax earnings … . [S]ales in the upcoming quarter will be compared to record sales in the prior year fourth quarter.”
Again, these sales present a challenge chiefly because they’ll include the final three months of the Jayco acquisition impact. Revenue in the fourth quarter of 2017 rose nearly 50% to $1.93 billion. It’s unlikely that Thor’s organic growth in the next three months will hit anywhere near that mark. Reading the tea leaves, investors should probably expect top-line growth similar to what the company posted in its most recent quarter: solid, if incremental growth in the low double-digits.
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