THOR Industries, Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

A leading manufacturer of recreational vehicles (RVs), selling a diverse range of products from towable RVs to motorized RVs across the United States, Canada, and Europe.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

THOR Industries is the world’s largest manufacturer of RVs, with a portfolio that includes towable RVs, motorized RVs, and related parts and accessories. The company’s operations are primarily divided into three segments: North American Towable RVs, North American Motorized RVs, and European RVs.

  • North American Towable RVs: This is the largest segment, focusing on travel trailers, fifth wheels, and other types of towable RVs, such as folding trailers.
  • North American Motorized RVs: This segment manufactures Class A, B, and C motorhomes.
  • European RVs: This segment focuses on towable and motorized RVs sold in Europe.

The company’s financial reporting reflects these segments, as well as details on revenue, income, assets, and liabilities. Revenue streams are primarily through sales to independent dealers, with a small number of sales coming directly to customers, although it is not material for their revenues.

Industry Analysis

  • The RV industry is cyclical and heavily dependent on consumer discretionary spending. Economic conditions, like recessions or high unemployment, can significantly impact RV sales.
  • Demand for RVs is closely tied to economic conditions, credit availability, and consumer confidence.
  • The industry is competitive, with a few dominant players that have substantial economies of scale, and a great number of smaller competitors, who compete on price and regional market presence.
  • The RV market has shown increased volatility in recent periods. Due to the COVID-19 pandemic, there was an increase in the demand for RVs, fueled by the desire to travel while avoiding air travel and staying close to home. This increase led to the largest demand for RVs and therefore very low inventories at dealers. As this demand has slowly subsided, prices have normalized and inventories have grown. There has been an increase in promotional sales to move the inventory.
  • The industry has also faced supply chain constraints, mainly in terms of chassis availability, and this constraint led to a decrease in production and thus sales volumes. With interest rates rising, consumers are also feeling the pinch in terms of higher loan rates. Due to all of this, sales have taken a hit, and margins are slowly eroded due to these factors.
  • The RV market has seen a preference shift toward smaller, more fuel-efficient RVs.
  • The long-term outlook for the RV industry remains positive, driven by demographic trends such as the aging population and the desire for recreational travel and outdoor experiences.

Competitive Landscape

  • THOR Industries faces competition from other large RV manufacturers like Forest River and Winnebago, and a host of smaller manufacturers and private RV sellers.
  • The market is characterized by moderate fragmentation, with both large and smaller players.
  • Price competition in the industry is generally based on cost and efficiencies, because manufacturers have limited ability to differentiate their core products.
  • The supply chain of RV manufacturing is complex and includes many different parts, making vertical integration extremely difficult.
  • There have been concerns in the latest earnings calls about aggressive price competition, which may affect future margins.

What Makes THOR Different

THOR Industries is the largest RV manufacturer in the world, benefiting from its economies of scale and broad distribution network. Having the most market share in North America allows the company to offer dealers better services, and also have some negotiation power over suppliers and the manufacturers of components. The company has a diversified portfolio of brands and products, which allows it to cater to a wide range of customers and preferences. They also have operations globally, in North America and Europe, which are also major RV markets. The company is a leader and innovator in the space, that tries to create products that meet consumer preferences. However, the competitive advantages may not be extremely strong as the products are not heavily differentiated.

Financials in Detail

Revenues:

  • THOR’s revenues are predominantly driven by RV sales in North America, specifically Towable vehicles, and the European market, especially motorized RV sales.
  • A significant portion of revenue is derived from sales to independent RV dealers, and some sales are through OEM sales and direct consumer sales.
  • The company has seen growth, especially in the early 2020s, due to the pandemic and the increase in RV popularity. But recently, sales have slowed down due to various factors, especially in North America.
  • In fiscal year 2023, net sales were 11.1 billion, a decrease from 16.3 billion from the last fiscal year. Europe sales decreased by about 15.4%, while the North American segment decreased by about 35.7% YoY. This signals a slowdown in the economy and a preference shift from RVs to other experiences that are not constrained by economic cycles.
  • The company has seen some price increases in the industry, but it may not be able to keep passing on all the costs to the consumer in a competitive environment.

Margins:

  • Margins in the RV industry can be highly variable, and are highly dependent on raw material prices.
  • The margin levels that THO has shown is typical of the sector.
  • THOR’s margins have contracted in the latest financial year, as sales have declined and there has been a need for increased promotional sales to clear inventories, which was an unprecedented high for dealers.
  • Operating profit margin decreased from 9.4% in 2022 to 5.6% in 2023. Profitability is clearly on a decline for the company, and a recession in the broader economy would hurt it even more.
  • Net income also decreased from $982.9 million in 2022 to $462.1 million in 2023.

Capital Structure:

  • THOR Industries has a manageable debt-to-equity ratio. The company also makes use of debt for financing projects, but is not very highly leveraged, which provides good financial stability.
  • Cash flows remain healthy despite the decline in sales.
  • The company also has a strong cash position.
  • In a year-over-year basis, total assets have seen a slight decrease, while liabilities have declined a bit as well.
  • At the end of July 31, 2023, THO has a cash balance of $292.6 million and a debt of $1.75 billion. These values are a bit skewed, because of the seasonality of the RV business, but still are a sign of stability.

Other Factors:

  • THO continues to innovate with new technologies and features for its RVs, like alternative materials and more electronics. But it is difficult to determine if these are sustainable advantages.
  • The company has an ongoing emphasis on environmental sustainability with production and product offerings.

Moat Analysis: 2 / 5

THO Industries possesses some key advantages: economies of scale through a wide and geographically large distribution network, brand strength, and some switching costs for suppliers. However, these do not create a wide and extremely defensible moat.

  • Brand Recognition: The company has some popular brands such as Airstream and Thor, but these are just a small part of their portfolio of brands, and they are easily copied.
  • Distribution Network: THO operates a huge dealership network, which would be very costly for a competitor to replicate, but it is not exclusive, and there is not much customer loyalty to a specific dealership.
  • Switching costs: High for some manufacturers that buy components from THO.
  • Scale: Operating a larger production capacity provides benefits, but this can be achieved by competitors too. Based on all this, the rating for the moat would be 2 out of 5. It’s not necessarily bad, but not as defensible as other industry leaders.

Risks to the Moat

  • Cyclical Demand: The RV industry’s cyclical nature makes it vulnerable to economic downturns, leading to sales declines and price pressure. This is a major risk, and can hurt the business and its ROIC for extended periods of time.
  • Raw Material Prices: Rising prices for inputs like aluminum, steel, and plastics can erode profitability. They may not be able to pass all these costs to consumers.
  • The company has acknowledged that inflation may continue to persist, along with high interest rates. This can significantly harm sales and margins.
  • Competition: Intense competition from other RV manufacturers can lead to price wars and margin erosion and also pressure on market share. This is especially true if supply chain problems and inflated costs keep affecting the industry.
  • Technological Change: Shifts in consumer preferences and technology can undermine the value of established brands and current product offerings. There is little differentiating them, so tech disruptions can harm the business further.
  • Economic Downturns: Economic uncertainty can negatively affect consumer discretionary spending, especially towards luxury purchases like RVs, thereby hitting sales hard.
  • Geopolitical risks: War and international conflicts can directly impact the supply chain as well as create a negative consumer sentiment, that could hurt business in all geographies.

Business Resilience

  • THOR has shown a decent ability to bounce back from downturns, which speaks to the brand strength and scale advantages.
  • The current cash position is robust and helps tide through any industry-specific problems. It also has a low debt position, which will assist it in surviving downtrends.
  • The business has had a decent performance over a long period of time. This shows resilience to market dynamics, and gives a certain degree of confidence about the future. However, these are not guarantees for good performance always.
  • The diversification of its geographic and product base also helps cushion the impact of demand decline in any one of its segments. However, they have all been facing slowdowns, so this might be less effective than it should be, ideally.

Understandability: 2 / 5

  • The RV business, on the surface, is relatively simple. But it’s more difficult to fully comprehend all the intricacies of its segments, supply chain, manufacturing, and geographical presence.
  • Their financial reports are extremely lengthy and complicated, and require good analytical and accounting knowledge to fully understand them.
  • They have many different acquisitions, and it can be difficult to fully understand each of the brand’s performance.
  • There are many variables, like pricing of raw material, sales price for RVs, inventory and consumer preference, that influence the company, which makes the analysis a bit more complicated.

Balance Sheet Health: 4 / 5

  • A cash balance of $292.6 million, while a total debt of $1.75 billion is an acceptable and sustainable debt balance.
  • The company has a very high tangible assets value, due to its properties and inventory levels.
  • The company also has a reasonably high current ratio, signaling the company’s ability to pay off short-term debts.
  • The company is able to generate considerable cash, which helps its liquidity.
  • Overall, it’s a pretty healthy financial position.