The Ride Higher Runs Out of Gas

Following second quarter results that showed further improvement from a year ago, Thor Industries (THO) stock retreated nearly 8% on Tuesday because it was not as impressive as analysts had hoped. Thor, manufacturer of recreational vehicles and busses, swing to a profit of $11.9 million or 22 cents per share from a loss of $14.9 million or 27 cents a share last year. Profit fell short of consensus estimates of 28 cents per share. Revenue grew a whopping 90% to $430 million, which topped analysts’ estimates by $2 mln. Considering sales were slightly better than inline, it was higher than expected costs that turned out to be the culprit for Thor’s disappointing quarter.

There is little doubt that the first half of the year has been far better in fiscal 2010 than it was in 2009, as EPS of $.65 per share easily topped the loss of $.18 in the prior period. A quarter ago, Thor Industries returned to profitability in both RV’s and bus product lines, but the biggest turnaround has been in RV’s. RV sales in the quarter rose 150% to $335.8 million, which has completed a six month turnaround of $64 million in net income compared to the first half of last year. The company has seen a relatively strong rebound in demand for RV’s (including the brand Airstream), which in combination with generally stable costs has boosted results. However, the stock has already priced in the improved sales trends trading more than 270% higher than a year ago coming into the day.

According to our methodology, we view THO as Overvalued at the current price level, and the market’s historical valuation suggests the stock is overheated. For example, on a price-to-cash earnings basis THO has normally traded for 13.5x to 31.8x, but the stock currently trades well above that historically normal range at nearly 40x cash earnings per share. Now, we do understand that the company is returning to a more normal operating environment, and should see further normalization in the second half of the year. However, the stock is now trading at not far from the price level achieved in 2006 and 200, when both sales and earnings were far better than they are today.

For long term investors, we would recommend looking elsewhere for a value stock because this one has already pulled away. The worst days are hopefully behind them now as general economic improvement is great news for this stock (beta coefficient over 2), but it has been bid up aggressively already in the last year. We will need to see further improvement to the underlying fundamentals or the price to decline below $30 before we consider upgrading THO.

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Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

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