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Baird Touts Thor Industries Stock Investments

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June 7, 2013 by   - () Leave a Comment

Editor's Note: The investment firm of Robert W. Baird & Co. issued a client newsletter following this week's release of the third quarter results for Thor Industries Inc. Excerpts from the Baird newsletter follow.

Raising price target. 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. Net, the weak margin overhang has begun to clear, supporting a brighter outlook.

EPS upside. Adjusted EPS significantly exceeded consensus expectations ($0.97 vs. $0.88), driven by solid margin upside. A lower tax rated added $0.04. Adjusted EPS excludes a $0.15 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.

Raising estimates. We are raising our adjusted EPS estimates to $2.90 (F2013) and $3.35 (F2014) based on a more optimistic margin recovery. We are bullish on RV demand as negative equity evaporates, fueling a more robust replacement cycle. We expect RV retail volume to grow 10% in F2014, including solid 10% in towables and 15% in motorhomes. Dealer inventory is higher (+14%), but is turning and appears fresh. In a robust industry recovery scenario in which Thor achieves its margin goals, we see earnings power of near $4.50/share.

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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