Baird: Thor Beats Estimates on Higher Margins

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June 7, 2013 by   Comments Off on Baird: Thor Beats Estimates on Higher Margins

The investment firm of Robert W. Baird & Co. issued a client newsletter following Thursday’s release of Thor Industries Inc.’s third quarter report. Portions of the Baird newsletter follow.

Raising price target. Earnings per share (EPS) exceeded expectations on significantly better margin. The margin trend is encouraging as it appears sustainable. We raised our F2013 and F2014 outlook and see potential to earn near $4.50/share in a robust recovery scenario, supporting our revised $48 price target. Fundamentally, we continue to expect demand to recover as negative equity evaporates. Meanwhile, dealer inventory increased 14% to support retail growth but appears fresh. The weak margin overhang has begun to clear, supporting a brighter outlook.

EPS upside. Adjusted EPS significantly exceeded consensus expectations (97 cents vs. 88 cents), driven by solid margin upside. A lower tax rated added 4 cents. Adjusted EPS excludes a 15 cent loss related the sale of the ambulance business. Management previously had expected second-half operating margin to be “consistent with” the second half of last year – but with adjusted EBIT margin 50bp better in Q3, trends clearly have improved. Recall that Thor previously reported strong revenue growth (+13%) and a healthy backlog (+24%) in May.

Encouraging margin recovery. After a period of excessive discounting, promotional pricing has “stabilized.” Thor discounted to defend lot space early in the season, betting that strong retail would support follow-on orders at better margins. With retail up 12% and margin improving, the plan worked. Meanwhile, actions to drive a 200bp margin recovery over three years are gaining traction, supporting a more optimistic profit scenario.

Big picture. We are warming to Thor as margin pressure abates. As the leading RV manufacturer, Thor is particularly well positioned to capitalize on a robust cyclical recovery. We believe the negative equity overhang that has delayed the replacement cycle has begun to clear, supporting a more optimistic outlook. We raised our price target to $48 and would look to add, especially on a pullback.

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