How Thor Industries Motors Ahead of the Competition

According to a forecast published by the Recreational Vehicle Industry Association, shipments of RVs by manufacturers are expected to grow nearly 4% during 2013. This may not seem like a big increase, but it follows two straight years of very strong growth.

Drivers of this growth include the desire to experience nature and outdoor activities while sharing these experiences with family members. RV enthusiasts also save money on their trips compared to other forms of travel and lodging. A study by PKF in 2011 showed that a family of four in an RV can save 23% to 59% on trips, even including the cost of owning the vehicle and fuel.

Today we'll look at Thor Industries (NYSE: THO  ) , which is the leader in the RV manufacturing industry in North America. We'll also look at close competitor Forest River, owned by Berkshire Hathaway (NYSE: BRK-A  ) , and Winnebago Industries (NYSE: WGO  ) , which is much smaller in terms of unit sales but just as mighty as Thor in terms of brand recognition.

Industry leadership as shown by the numbers
Owning more than a third of your market is an outstanding achievement. Thor, based on U.S. and Canada retail RV registrations, had 34.4% of the market as of last November. Forest River followed closely behind with 33.2%.

Thor manufactures both towable RVs that are pulled by another vehicle and motorized RVs that have their own engines. The company is No. 2 in travel trailer sales, No. 1 in fifth wheel sales (which anchor to the back of a truck bed rather than being pulled by a trailer hitch), and No. 2 in motor home sales, where it is clearly gaining strength.

A Thor fifth wheel. Source: Thor Industries

Thor's excellent performance isn't just a recent thing. The company has been profitable every year since it began operations in 1980. The RV market is highly cyclical and Thor has been able to weather down times and still remain profitable.

Since the RV industry bottomed out from the Great Recession in 2009, Thor's wholesale unit sales have grown at a CAGR of 15.2%. In its motorized segment, the CAGR was an even more spectacular 26%.

A strong first quarter
For the company's first fiscal quarter ending Oct. 31, Thor announced a 5% increase in revenue compared to the same quarter last year. Revenue reached $800 million.

Although the bulk of Thor's sales come from the towable segment (nearly 78% in the first quarter), the major growth was in the motorized segment which was up 45% from the prior year's first quarter. The towable segment was down slightly by 3% from the same quarter last year.

The classic look of Thor's "Flying Cloud" towable RV. Source: Thor Industries

Thor is putting a great emphasis on manufacturing efficiency, and it showed in the 100-basis-point increase in gross profit percentage the company experienced in comparison to 2012. Gross profit in dollar terms rose 14% on the 5% increase in sales.

The company also managed selling, general, and administrative expenses well, recording a 10 basis points decline in these expenses as a percent of revenue. Net income was up nearly 33%.

In the company's recently released investor presentation, I liked how the company pointed out its philosophy of no "pro forma" earnings: "We report net income, not adjusted earnings to cover up performance." 

How refreshing!

Comparison to Winnebago
Winnebago's first-fiscal-quarter results, for the period ending Nov. 30, were also splendid. Revenue increased a full 15% versus the same quarter last year. Net income of $11.1 million represented a more than 50% increase year over year. The company reported strong demand for its new products and was able to maintain firmer pricing, resulting in higher operating margins.

Winnebago continues to gain recognition for its innovations. Its Winnebago Trend model was named "2014 Top RV Debut" by RV Business Magazine.

A chill in the air during the second quarter
On Feb. 4, Thor released preliminary second-quarter results. Surprisingly, they showed a decline in revenue (though a minuscule one) from the second quarter a year ago. Does this signal a slowdown in the RV market? Not really. The variance was due to Old Man Winter sending some truly awful cold to the Midwest, which interfered with Thor's manufacturing facilities there.

The RV market's -- and Thor's -- continued strength was shown in the whopping 37.1% increase in consolidated order backlog compared to the same quarter last year. This backlog will make upcoming quarters' results look even better.

Why Thor rules
The company's competitive advantage has a number of different elements. On the production side, Thor emphasizes assembly of components supplied by other manufacturers. This results in lower manufacturing overhead and higher return on assets.

The company's size also gives it economies of scale and purchasing power.

Consumers have shown they want a wide range of choices in RVs in terms of size, floor plans, interior décor and technology (or gadgets.) Thor definitely delivers. At a large RV show I attended, I had no idea many of the RV brands I looked at were part of Thor. They were so diversified in size and function I assumed they were from a number of different manufacturers.

Thor's products support an active, outdoor lifestyle. Source: Thor Industries

What we learned
The RV industry came roaring back from the recession as pent-up consumer demand finally translated into sales. A question I have is how much of this demand that was pent up is now spent. In Thor's case, though, it doesn't need double-digit increases in sales to achieve healthy profit increases. One of the initiatives in its three-year strategic plan is to achieve a 200-basis-point improvement in gross margin.

Thor anticipates continued strong demand for its products. In mid-February, the company announced that it was acquiring a 220,000 square foot production facility in Indiana in order to accommodate growth in demand.

Thor's motor coaches allow RV enthusiasts to travel in style. Source: Thor Industries

Thor also has made recent acquisitions that expand its product line. This included Bison Coach, a niche manufacturer of equine trailers that include human living quarters (hopefully facing the front of the horse, not the rear), and Livin' Lite, a maker of folding camping trailers.

It would take a serious downtrend in the economy to slow down the momentum of Thor, Forest River, and Winnebago. Especially Thor, which has a sound strategic plan in place to maintain its industry-leading position.

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