Editor’s Note: The following study comes courtesy of the Motley Fool and writer Seth Jayson. He had no position in any company mentioned in this article at the time of publication. He is co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio.
Margins matter. The more Thor Industries keeps of each buck it earns in revenue, the more money it has to invest in growth, fund new strategic plans, or (gasp!) distribute to shareholders. Healthy margins often separate pretenders from the best stocks in the market. That’s why I check on my holdings’ margins at least once a quarter. I’m looking for the absolute numbers, comparisons to sector peers and competitors, and any trend that may tell me how strong Thor Industries’ competitive position could be.
Here’s the current margin snapshot for Thor Industries and some of its sector and industry peers and direct competitors.
Company TTM Gross Margin TTM Operating Margin TTM Net Margin
Thor Industries 13.3% 6.6% 4.6&
Polaris Industries 27.3% 11.6% 7.3%
Honda 27.3% 7.4% 6.7%
Winnebago Industries 5.8% 0.1% 2.3%
Source: Capital IQ, a division of Standard & Poor’s. TTM = trailing 12 months.
Unfortunately, that table doesn’t tell us much about where Thor Industries has been, or where it’s going. A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases. Conversely, a company with gross margins that inch downward over time is often losing out to competition, and possibly engaging in a race to the bottom on prices. If it can’t make up for this problem by cutting costs — and most companies can’t — then both the business and its shares face a decidedly bleak outlook.
Of course, over the short term, the kind of economic shocks we recently experienced can drastically affect a company’s profitability. That’s why I like to look at five fiscal years’ worth of margins, along with the results for the trailing 12 months (TTM), the latest fiscal year, and the latest fiscal quarter (LFQ). You can’t always reach a hard conclusion about your company’s health, but you can better understand what to expect, and what to watch.
Here’s the margin picture for Thor Industries over the past few years.
Source: Capital IQ, a division of Standard & Poor’s. Dollar amounts in millions. FY= fiscal year. TTM = trailing 12 months.
(Because of seasonality in some businesses, the numbers for the last period on the right — the TTM figures — aren’t always comparable to the FY results preceding them.)
Here’s how the stats break down:
- Over the past five years, gross margin peaked at 14.1% and averaged 12.5%. Operating margin peaked at 8% and averaged 5.8%. Net margin peaked at 5.3% and averaged 3.9%.
- TTM gross margin is 13.3%, 80 basis points better than the five-year average. TTM operating margin is 6.6%, 80 basis points better than the five-year average. TTM net margin is 4.6%, 70 basis points better than the five-year average.
With recent TTM operating margins exceeding historical averages, Thor Industries looks like it is doing fine.