Expect More From Thor

20 Apr 2018 12:45
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Thor is down 37% from its high of $161/share and many investors have been disappointed over the last 6 months on two issues. The first and most recent issue was over a declining backlog of towable orders in their most recent quarterly report that has sent their share price tumbling to $102/share in the last couple of months.

The second disappointment was back in October when THO announced a dividend increase of 12% which at the time brought the dividend yield up to a paltry 1%. Shareholders were growing frustrated as revenue and earnings which have been surging the last couple years has not resulted in more sharing of the wealth and expected a much larger increase. Historically THO has paid a dividend yield in the range of 2 to 2.5% so their frustrations were not without merit.

But before throwing in the towel it is important to understand what this board is doing with their increased cash flow if not sharing with investors. One balance sheet item that THO despises is long term debt. Up until recently their long term debt obligations was always maintained at a value $0 (nada, zip, nothing). They would always fund new investments with cash and grow the business. But, then Jayco came along, it was an opportunity the THO couldn’t pass up to grow business. The problem was Jayco was valued at more than the cash they had on hand so they acquired long term debt ($360M) to fund the acquisition. Jayco instantly added to the top and bottom line numbers and combined with a hot market created a massive increase in free cash flow. THO, who despises debt, has spent the last 2 ½ years using a large portion of this cash flow to aggressively pay down debt. In their latest quarterly filing, long term debt was reduced to $80M and is being projected to be paid off by the end of 2018.

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This was not the only area free cash flow was redirected. THO’s timing of the Jayco acquisition was near perfect. The RV market was on fire and the biggest driver was millennials buying the more affordable towable units. Backlog skyrocketed and which resulted in a capacity issue. In 2017 the company tripled their capital expenditure investments to expand capacity of manufacturing the towables and plan to invest an additional $110M in 2018. In my opinion it is too early to determine if the recent reduction in backlog is due to slowing demand or improved capacity. This will be easier to determine when the next quarterly report comes out and we can re-calculate inventory turn rates (the rate of how many times a year that a company can sell and replace their inventory). If the rate is higher than last year then capacity is the reason for a declining backlog.

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2017 2016 2015
Inventory Turn Rate 13.47 9.54 14.01

What does this mean dividend investors? This October when they traditionally announce a dividend increase there will be a large availability in forward free cash flow! I expect some will be retained for future acquisitions and a large portion will be returned to shareholders in a minimum dividend increase of 50% to bring its dividend yield back to historic levels. At the current price of $102/share that would bump the yield to 2.12%. If THO fails to deliver an increase of this size or greater it may be time to dump the shares and move on.

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