Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
Motor home specialist Thor Industries ( THO -0.01% ) reported earnings for fiscal Q2 2018 after the market closed yesterday, and its stock promptly plummeted 4% in after-hours trading. But this, in the opinion of at least one analyst, is great news.
Responding quickly to what it calls a buying opportunity in Thor stock, Aegis Capital announced this morning that it's upgrading Thor shares to buy and assigning the stock a $150 price target. Peer analyst Stifel, meanwhile, kept its rating at hold but raised its price target on Thor stock by $10, to $142 a share (which is 17% more than Thor stock costs today).
Here's what you need to know.
Why Thor got hammered
Why did Thor stock sell off last night? That's a very good question, because Thor's earnings were actually pretty great. The company reported GAAP earnings of $1.51 per share, beating analyst estimates, and revenue of $1.97 billion -- also ahead of expectations. Profits were up 23% year over year, gross profit margin expanded by 40 basis points to 13.7%, and sales surged 24%.
CEO Bob Martin characterized Q2 as "another period of exceptional growth of both sales and earnings," in which Thor "achieved our third highest sales level of any quarter in the Company's history" as the company expanded to offer RV "products ... at all price points along the spectrum."
About the only bad news in Thor's release was that the labor market in northern Indiana was getting "tight," threatening to raise labor costs. Combined with "some inflationary price increases in certain raw material and commodity-based components," this threatens to push profit margins back down again.
Still, Martin averred that Thor is working "to manage these challenges," and promised "meaningful growth" in 2018.
What does "meaningful" mean?
That right there might be the problem, though -- Martin's failure to give investors a solid number, or even a range of numbers for this year's earnings guidance. Saying that growth will be "meaningful" is all well and good, but it doesn't give investors much on which to hang a valuation.
That being said, Stifel highlighted Thor's 34% growth in backlogged orders, combined with inventories growing no faster than sales, as indications that RV sales will continue growing, in a note covered on StreetInsider.com (requires subscription). While hedging that "much is riding on the spring selling season," Stifel nonetheless felt confident enough to raise its fiscal 2019 earnings estimate for Thor by $0.30, to $11.80 a share.
What other analysts are saying
Although Stifel isn't following Aegis's lead in recommending Thor as a buy, it's worth pointing out that that $11.80 earnings target for next year runs significantly ahead of the Wall Street consensus. Most analysts are predicting Thor will earn just under $11 a share, according to data from S&P Global Market Intelligence.
What should investors do now?
Meanwhile, in the here and now, Thor stock is selling for a modest 14.5 times its $8.34 per share in trailing earnings. When you consider that most analysts see these earnings surging by nearly 32% through the end of next year -- and that Stifel is predicting something more like a 41% increase in earnings -- 14.5 times earnings seems like a very small price to pay for such exceptional growth.
Granted, long-term earnings estimates still predict that Thor's growth will eventually slow, and earnings will rise only 15% on average over the next five years. But between the stock's seemingly cheap P/E ratio, its rock-solid balance sheet ($151 million in cash, and only $90 million in debt), and its modest dividend yield of 1.2%, I'd say Thor stock is selling for a nice price at worst -- and a significant bargain at best.