Thor Industries: Well-Managed Leader in Oligopolistic, Rational Industry

Javier López Bernardo of BrightGate Capital presented his in-depth investment thesis on Thor Industries (US: THO) at Best Ideas 2023.

Thesis summary:

Thor Industries is a US-based manufacturer of recreational vehicles (RVs), both trailers and motorhomes. After a decade in which the company has pursued a well-executed acquisition policy to consolidate the industry, THOR is the undisputed leader by market share and product breadth. The RV manufacturing industry presents attractive characteristics for investors with a long-term time horizon. In addition, the management team (along with the company’s chairman emeritus) is aligned with shareholders and has extensive experience in the industry.

Main points of the investment thesis

Although a cyclical industry, the RV sector is a niche market with a stable oligopolistic structure, a long and consistent history of strong shareholder value creation and virtually no competition from foreign producers. These characteristics have meant that THOR has not posted a loss-making year in the past three decades.

THOR has leading positions in both the towable and motorized vehicle segments, with market shares in 2022 of 41% and 48%, respectively. Although the RV manufacturing process is not highly automated, so economies of scale from higher production levels are modest at best, the size helps in dealing with distributors and suppliers and establishing best practices. THOR also has a leading position in the European market thanks to the acquisition of Erwin Hymer Group (EHG) in 2019. The European market is much more fragmented than the U.S. market and could be a source of future growth for THOR.

THOR has a strong balance sheet and an attractive shareholder remuneration program, consisting of a growing dividend and a $600 million share repurchase authorization through 2025 (approximately 15% of current market cap).

THOR’s stock valuation discounts very pessimistic scenarios going forward. At $75 per share, the company has an EV of approximately $5.5 billion, implying EV/NOA’22 and EV/NOI’22 multiples of 1.1x and 5.7x, respectively. On a leveraged basis, THOR trades at a P/BV of 1.1x and a P/E’22 of 4.4x. Given that THOR’s average return on net operating assets (RNOA) has been around 20% over the past decade (ROE of 19%), and residual earnings have grown at a good pace, the level of discount at which the shares are trading is excessive. Assuming an 8% discount rate (EV), a 2% growth rate in residual earnings and much lower future RNOA (14%), would yield a target price of $160, implying a return on equity of 15.4% in perpetuity.

Downside risks

• Long-term demand in the US stabilizes below 350k units, either due to lack of interest or because the economic slowdown is longer than expected.
• The RV components industry has become very consolidated in the last decade (LCI Industries, Patrick Industries), and while the relationship is good, further consolidation could erode THOR’s bargaining power.
• Although the RV distribution industry is currently highly fragmented, there is being a flurry of consolidation by some players (RV Retailer, Camping World) that could weaken THOR’s bargaining power in the long run.
• In the long term, the introduction of autonomous RVs may spark interest from auto OEMs to participate in the RV industry, increasing competition.

Upside drivers

• Share repurchases at (or below) these levels.
• THOR keeps acquiring European companies at reasonable valuations to consolidate the industry.
• Additional upstream acquisitions components at reasonable valuations.

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About the instructor:

Javier López Bernardo is currently Portfolio Manager (equities and high yield) at BrightGate Capital SGIIC, an independent asset management boutique company based in Madrid, Spain.

He holds a Bachelor in Business Administration (major in finance) by the Universidad Complutense de Madrid, a Master in Corporate Finance and Investment Banking by the IEB and a Master in Economics by Kingston University, where he also earned a Ph.D. in Economics. His academic research on equity markets and growth theory has been published in leading international journals.

Additionally, he has been a full-scholarship holder for two years by the Ramón Areces Foundation and he is a CFA charterholder. He is a lecturer for the CFA program and he also regularly delivers lectures in commodities, value investing and behavioral finance.

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