Many people think of recreational vehicles as part of an iconic American pastime associated with the love of the open road. For Thor Industries (NYSE:THO), the RV manufacturer's corporate home in Elkhart, Indiana, might seem about as far removed from international trade tensions as you could image. Yet even though the RV market has been extremely strong lately, Thor believes that what's been going on between Washington and foreign trade partners could create headwinds that will eventually make their way to this company in America's heartland.
Coming into Wednesday's fiscal third-quarter financial report, Thor investors had high hopes that the good times would continue for the RV manufacturer, and the company's results showed considerable strength. At the same time, though, company executives are looking at the potential for higher input costs to eat into profits. Although Thor is optimistic that it can overcome rising price pressures, the fact that they exist at all seemed to come as a surprise to some of its shareholders.
Thor keeps driving forward
Thor Industries' fiscal third-quarter results were impressive. Sales were higher by 12% to $2.25 billion, setting a record for a third-quarter period for the company. Net income rose at an even faster 20% rate to $133.8 million, and that produced earnings of $2.53 per share. Even though those growth rates were solid, Thor's bottom-line performance lagged the consensus forecast among investors for $2.58 per share.
Recent trends have been favorable for the RV industry, and Thor's quarterly results showed that those are largely intact. Towable RVs again led the way for Thor, with a 13% rise in segment sales. Both travel trailers and fifth-wheel RVs saw similar-sized gains from year-ago levels, and pre-tax profit for the segment was higher by 10% compared to the third quarter of fiscal 2017.
Motorized RV sales growth was only slightly slower, with sales climbing 9%. Lower margins ate into profitability for the unit, though, with segment pre-tax income rising just 4% from year-ago levels. Interest in larger motorhomes exceeded that for smaller units, with the largest gains in unit and dollar-volume sales coming in the largest Class A motorhome segment. By contrast, Class B sales were down from year-ago levels.
One area where investors might have been concerned was order backlog. Thor saw towable backlog fall $260 million to $1.3 billion, while motorized RV backlogs were down 12% to just under $700 million. Yet Thor explained that improved capacity has helped the company deliver RVs faster, and it believes that the new levels should remain fairly constant and become normal going forward.
CEO Bob Martin expressed his pleasure about Thor's performance. "Our third quarter results reflect another period of solid growth of both sales and earnings," Martin said, "[as] we continue to leverage the strength in industry demand to drive the year-over-year growth in both our top and bottom lines." The CEO also commented that he sees backlogs at a "healthy level" and praised Thor's added capacity to provide a "more stable production environment."
What's down the road for Thor?
Yet there were a couple of comments that indicated potential problem areas for Thor. As Martin said, "While labor costs have moderated, we are experiencing inflationary price increases in certain raw material and commodity-based components due in large part to the headwinds created by the announcement and implementation of the steel and aluminum tariffs and other regulatory actions, as well as higher warranty costs." The CEO has confidence that Thor can manage those input factors effectively and find offsets for cost increases, but the news still threw some cold water on record results.
Thor could also have a hard time building on its past success. In the fiscal fourth quarter, tough year-over-year comparisons will make it hard for the RV manufacturer to deliver the growth that investors are used to seeing. Nevertheless, executives see a continued willingness among customers to embrace the RV lifestyle, and the fact that younger buyers are flooding into the market is a demographic shift that could persist for years to come.
Despite the solid results, Thor investors weren't pleased with the threats of higher costs, and the stock fell 5% in premarket trading Thursday morning following the Wednesday night announcement. With trade disputes in flux, shareholders will need to keep an eye on Thor to see whether tariffs stay in place and what impact they might have on costs going forward.