Thor Stock Looks Like A Risky Bet Now

by Trefis Team
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Thor Industries stock (NYSE: THO) is up 20% since the start of the year and has gained around 150% from its March lows. THO, a global manufacturer of recreational vehicles, faces downside risk as the company’s revenues in the last two quarters have declined by 9%. The ongoing Covid-19 crisis and the economic uncertainty is likely to result in lower demand for recreational vehicles. This is likely to impact the revenue growth rate of the company as sales-cycles are expected to take more time than usual, and this is likely to hit its profitability – leading to a drop in the stock price.

Following a large 150% rise since the March 23 lows of this year, at the current price of $88 per share, we believe Thor stock has reached its near term potential. Thor stock has rallied from $35 to $88 off the recent bottom compared to the S&P which moved 52% over the same time period. Gradual improvement in demand for recreational vehicles has helped the stock in beating overall markets. Moreover, the stock is up 70% from levels seen in early 2019, less than two years ago. Thor stock has fully recovered to the level it was before the drop in February due to the coronavirus outbreak becoming a pandemic. This seems to make it fully valued as, in reality, demand and revenues will likely be lower this year than last year. Our dashboard ‘Buy Or Sell Thor Industries Stock’ provides the key numbers behind our thinking, and we explain more below.

Some of the stock price rise over the last 2 years is justified by the roughly 4% growth seen in Thor’s revenues from $7.9 billion in 2018 to $8.2 billion in 2019. This combined with a 61% growth in Thor’s net income margin, helped Thor’s earnings surge by nearly 75% over the same time period, providing a boost to the company’s stock price. Overall, earnings on a per-share basis grew by 64% as shares outstanding increased by 2.3% due to new share issues.

Finally, Thor’s P/E ratio fell from around 21x in 2018 to nearly 18x in 2019. While the company’s P/E has now increased to 22x, it seems to be trading toward the higher end of the spectrum. We believe there is a possible downside risk for Thor’s multiple when compared to levels seen over the recent years, and the stock is unlikely to see much upside after the recent rally and the potential weakness from a recession-driven by the Covid outbreak. 

How Is Coronavirus Impacting Thor’s Stock?

The global spread of coronavirus has affected industrial and economic activity across the world, which is likely to adversely impact the company’s revenues as demand for recreational vehicles will take a hit. The economic slowdown is likely to reduce expenses by the public on discretionary products – considerably hurting the demand for the company’s offerings. Moreover, a disruption in supply has adversely impacted production capacity, further impacting the demand for Thor’s product. Overall, we expect demand to be lower in FY’2021 due to uncertainty resulting from the outbreak of coronavirus which leads us to believe that the stock is currently overvalued.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again. 

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

 

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