Thor Industries (THO) on the surface has a lot going for it, and this investment certainly carries a significant appeal. However, the underlying valuation does not make for a remarkably attractive investment.
In this article, I’ll highlight the positive dynamics in the first instance, followed by aspects that force me to remain on the sidelines.
Tight Control Over Balance Sheet
In February 2019, Thor Industries made a huge acquisition of Erwin Hymer Group (“EHG”). This acquisition cost approximately $1.8 billion. The acquisition was funded through Thor taking on debt:
- $2.1 billion Term Loan B (U.S. dollar-denominated tranche)
- €618 million tranche (~$700 million)
- $100 million asset-based credit facility (in actuality, the ABL reached $750 million, but only $100 million was used).
- And Thor giving approximately $145 million worth of shares to the sellers
The debt aspect is offset by approximately $450 million of cash and equivalents. Consequently, as of 31 July 2019 (end of fiscal 2019), its balance sheet had a net debt position of roughly $1.5 billion.
Now, on the positive side, it is important to note that the debt has very small interest payments of 4% or, in some instances, slightly less, while the ABL facility fares even better, and, on average, is less than 1.75%.
Furthermore, not only has Thor being extremely disciplined in paying down $480 million of debt since this acquisition in February but subsequent to its year-end, up to 30th of September, a further ~$138 million has been paid back of its outstanding funding.
Cash Flow Movements Are Bumpy
A quick and dirty glance at Thor’s free cash flow and it offers shareholders a claim on steadily increasing free cash flow generating company.
Source: author’s calculations, SEC filings
Having said that, the real devil is in the detail.
In the table which follows, we can see that, even though Thor’s cash flows from operations are steadily increasing, below the ‘line’, its growth is being spurred on through acquisitions of increasing size.
On balance, over the last 5 years, more capital has gone towards acquisitions ($2.4 billion) than back into shareholders’ pockets ($351 million towards dividends, plus $60 million towards share repurchases back in fiscal 2015).
And to be clear, there is absolutely nothing wrong with acquisition-led growth, as long as these capital allocation decisions are benefiting the shareholder. But any shareholder coming in over the past two and half years is likely to be holding a loss (even accounting for the 2.8% dividend yield).
Valuation – Cheap, But Won’t Trade At A Premium Either
The table below highlights p/cash flow metrics, as I find it insightful to use this ‘bird’s-eye view’ of a company’s ability to derive cash flows from operations before digging in further.
Source: author’s calculations
The table above is a reminder that the whole sector is presently trading out of favor. This is largely to be expected, given the overall cyclicality of the space.
Moreover, there is no question that, once a whole sector falls out of favor, there is often a strong opportunity to profit.
But being a deep value investor is not only about being a contrarian. It is about selecting opportunities where a large margin of safety is available, which I’m not fully convinced Thor Industries’ present market cap of $3 billion offers.
The Bottom Line
Investing is simple but never easy.
I attempted to highlight the positive aspects of why Thor Industries could go towards being a mightily rewarding investment, namely through its prudent paying down of debt.
At the same time, I noted the reasons for concerns that shareholders should be mindful of.
In conclusion, the investment could go either way, which is not a compelling enough reason to become a shareholder. Great investing is not about selecting potentials that ‘may’ work out favorably. Great investing is about being extremely selective so that the odds are very much stacked in the investor’s favor.
Find High Upside Potential!
Thor Industry has strong potential! And is certainly worthwhile following from the sidelines, and perhaps being opportunistic should the correct environment prevail.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.