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Baird: Thor Tops Forecast, Margins Improve

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June 10, 2011 by   Leave a Comment

Editor’s Note: Robert W. Baird & Co. issued a client newsletter following Thor Industries Inc.’s 3Q financial report. Excerpts from the Baird newsletter follow.

Action
Margin recovery under way: Thor beat expectations as margin recovered – reversing a discouraging trend that had some investors on the sidelines. Until the pace of retail demand improves, we expect some discounting to persist – but our earnings per share (EPS) estimate of $2.06 in F2011 and $3 in a recovery scenario still seem reasonable. Big picture, we like Thor for patient investors as our cyclical thesis unfolds – but note that the recovery has slowed with the economy.

Summary
• EPS upside: EPS topped our estimate ($0.72 vs. $0.68) and the consensus forecast ($0.67). Recall that Thor already reported preliminary sales (+25%), which topped our forecast ($849 million v $835 million) due to healthy dealer demand (+11%) and the Heartland RV acquisition.

• Margin recovers as discounting abates: Operating margin recovered on better volume and smaller discounts – a significant trend reversal after a string of disappointing quarters. Our checks indicate that some discounting persists, but has stabilized. Thor raised prices in February and has worked to manage promotional spending better recently.

• Outlook: Our investment thesis and $38 target price hinge on a cyclical recovery that has yet to gain momentum. In a reasonable scenario in which the RV market returns to 70% of peak demand scenario, we see the potential for Thor to earn over $3 per share. However, despite easier credit, debt-laden consumers appear to have little appetite for more – especially with higher gas prices and weak employment trends.

Details
• Industry Wholesale and Retail: Towable and motorhome shipment growth moderated through the back half of 2010 and into early 2011 on tougher comps due to restocking in early 2010. Retail growth has remained modest in early 2011, and with the bulk of the selling season just beginning, the recovery has been weaker than previously expected as consumer confidence and gas prices weigh on demand.

Q3 Summary
• Dealer Inventory: Contingent floorplan liability, a proxy for dealer inventory levels, increased 41% year-over-year (YOY) to $841 million (up 7% sequentially). After bottoming in 2010, we believe dealer inventories are at appropriate levels, evidenced by dealers’ willingness to stock units into the spring selling season. Going forward, we expect wholesale restocking at a 1:1 rate with retail sales.

• Backlog: Total RV backlog fell 5% YOY and 9% sequentially to $427 million. Towable backlog fell 3% YOY from record levels last year, but was up 5% sequentially. Motorhome backlog fell 14% YOY and 45% sequentially from elevated levels last quarter. The total RV backlog represents 58% of our next-quarter RV revenue estimate. The bus backlog fell 6% YOY and 7% sequentially to $206 million.

• Balance Sheet and Cash Flow: Thor ended the quarter with $59 million ($1.06/share) in cash and investments. The company has no debt. Balance sheet inventory increased 32%, with some inventory growth attributable to the Heartland acquisition.

This summary of a Baird research report is not intended as investment advice. To participate in Baird surveys and receive research reports, contact Craig R. Kennison, CFA, at ckennison@rwbaird.com.

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