Recreational vehicle (RV) manufacturer Thor Industries (THO 2.04%) just announced its acquisition of RV parts maker AirX Intermediate, otherwise known as Airxcel. Thor, owner of famous RV brands like Airstream and Dutchmen, will pay $750 million for its new subsidiary. Investors responded positively, bidding up Thor's stock more than 3% on Sept. 1, the day of the announcement. Here are three takeaways for investors.
1. The acquisition meshes well with Thor
Airxcel is a manufacturer, not just a reseller, of RV parts, meaning Thor is also gaining new factories and a lineup of part designs. Airxcel makes and sells original equipment manufacturer (OEM) parts to RV manufacturers like Thor, but also has multiple brands of aftermarket parts it sells to RV owners. Airxcel offers products like air conditioners, sinks, cooking appliances, roller blinds, specialty RV paneling, heating systems, windows, and ventilation.
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All of this appears to be an excellent fit with Thor's business. On the OEM side, it may be able to cut costs by owning one of the suppliers of its own parts. On the aftermarket side, it can add another revenue stream by selling RV accessories and aftermarket customization parts directly to customers. Thor didn't previously own a dedicated accessory or aftermarket part brand, with all its brands focusing on making and selling RVs instead. This represents an opportunity to branch out into a new but closely related market sector.
While Thor took on additional debt to fund $625 million of the purchase, the company's press release lists a number of benefits from the deal. These include being able to invest in and expand Airxcel's parts supply chain while boosting gross margin with RV aftermarket sales. Thor CEO Bob Martin said, "Airxcel will operate independently in THOR's decentralized business structure." He added that "the current management team at Airxcel will continue operating the business and serving their diverse customer base while gaining access to the financial strength of THOR to support their growth."
Thor expects the Airxcel acquisition to start boosting its earnings in fiscal 2022.
2. The market still looks favorable
RV sales data points to 2021 as an opportune time for RV-related expansion. Recreation and activities in the open spaces of the great outdoors have gotten an immense boost since COVID-19 lockdowns began. Some of these trends may now have momentum of their own extending beyond the need to escape home and social distancing, leading to strong multiquarter performance for everything from golf equipment and clothing companies to retailers of outdoor lifestyle products and sporting goods.
Research from the RV Industry Association (RVIA) provides concrete information about the ongoing RV demand surge. It reports July 2021 shipments rose 3.5% year over year to 44,537 units, the highest July total since the RVIA began. Significantly, there's also a shift away from smaller, cheaper, lower-margin RVs and toward larger, more expensive, higher-margin ones. This shift is potentially a significant boon for RV makers and sellers. Type C mini motorhomes saw sales drop 15.6% year over year, while shipments of the biggest Type As grew 19.5%. In such a positive environment, any RV-related acquisition by Thor is much more likely to be quickly accretive.
3. Other companies have had success with accessory sales
All of Thor's many past acquisitions are of companies and brands making travel trailers, RVs, and fifth wheels, rather than parts or accessories. However, RV seller Camping World Holdings (CWH 0.22%) has bought several brands of RV-related products. This company, which has also recently seen record-setting success in the vibrant early 2020s RV market, may provide some insight into whether RV-adjacent brands can help an RV company's growth.
Camping World acquired camping, hunting, and fishing company Gander Outdoors in 2017. It also has partnerships to sell RV-related furniture and is looking to expand the RV accessory category with its "Home on Wheels Improvement" department. Though too soon to show up in its results, it also made a July 2021 "strategic investment" in Happier Camper, a maker of modular furnishing cubes enabling easy RV interior customizing.
Camping World's outstanding Q2 2021 results show how profitable these RV-related sales are compared to other segments. The gross margin for its "products, service, and other" segment was 37.96%, which compares favorably to the new vehicle segment's approximate 28.4% gross margin or the used vehicle segment's 27.23% gross margin.
Camping World's case suggests Thor's expectation that the acquisition will lead to improved gross margin tracks with what has happened with similar acquisitions.
Thor's likely prospects
Though Americans are currently craving green, wide-open spaces as an escape from lockdowns, the RV sector is notoriously highly cyclical. The long upslope of growth beginning in early 2020 and continuing today is not typical of RV companies.
With that said, Thor still looks strong. Despite all the ups and downs in between, Thor Industries' stock still gained 410% over the past 10 years, and it's returned 1,453% over the past 20 years. With millennials now buying into RVs, growth is likely to continue into the future, and Thor's product diversification can only help it capture more of the profits from that market expansion. Investors with a high tolerance for cyclical upswings and downswings may want to consider Thor as a bullish long-term addition to a portfolio of industrial stocks.
