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Baird: Heartland Buy to Boost Thor’s EPS 10%

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September 17, 2010 by   Leave a Comment

Baird logoEditor’s Note: Robert W. Baird & Co. issued a client newsletter following today’s announcement that Thor Industries Inc. had purchased Heartland Recreational Vehicles LLC. Excerpts of that newsletter follow. To subscribe to this and other Baird reports, contact Craig R. Kennison, CFA, at ckennison@rwbaird.com or call him at (414)765-3870.

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Thor acquired Heartland RV, the fourth largest towable manufacturer. We expect the deal to add $0.21 to F2011 EPS, a 10% boost. Heartland is among the fastest growing RV manufacturers with comparable margins to Thor. We like the deal and believe shares discount a weak economic recovery – but we remain cautious on RV fundamentals as the economic recovery stalls.

Summary

Acquires Heartland RV. Thor has acquired Heartland RV in a cash/stock deal valued near $209 million (including $100 million in cash and 4.3 million Thor shares valued at $109 million based on the Thursday close). Heartland generated $400 million in revenue in the last 12 months.

Fastest growing RV company. Heartland is the fourth largest towable company in the U.S. with 6.7% of the market, bringing Thor’s combined share to 46.6%. So far this year, Thor has added nearly 3 percentage points (pp) to its share, and Heartland has added near 2pp – consistent with our dealer surveys in which Heartland was listed as the most likely towable manufacturer to gain share in the next six months.

Accretive to EPS. Management expects the deal to be accretive. We see the deal adding $0.21 to EPS in F2011 ($0.24 on an annualized basis), based on our view that Heartland operates with a similar margin profile to Thor’s RV business.

Outlook. Thor is executing well and the Heartland deal makes sense, in our view. However, we maintain a cautious outlook for the RV sector as consumer confidence falls, unemployment festers, consumers reduce debt, and tax policy targets discretionary wealth. We believe shares discount this cautious outlook and may benefit from political change brought about by the election cycle or a change in tax policy, supporting our Outperform rating despite our cautious outlook.

Details

Market share. Thor controls nearly 40% of the towable market, and has gained nearly 3pp so far in 2010. Heartland has quickly risen to become the fourth largest towable manufacturer with nearly 7% of the market, adding nearly 2pp so far in 2010 (see chart below).

Market share

Heartland share gains. Heartland outpaced the industry through the downturn and continues to gain share. Dealers expect this trend to continue. According to our most recent RV survey, dealers expect Heartland to gain more share in towables than any other manufacturer over the next 12 months.

Market share 2

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