Recreational-vehicle (RV) stocks are suddenly on the move again after a painful cyclical pullback in the industry. Thor Industries (THO -0.16%) shares jumped earlier this month, following the RV manufacturer's Q2 earnings update. The stock is now up 27% year to date, nearly double the S&P 500's 14% return so far in 2023.
Are investors being too optimistic about Thor at a time when sales and profit margins are shrinking? Or is this the right time to accumulate a position in this market-leading, cash-rich business? Let's take a closer look.
No rebound yet
Thor's early June earnings update contained no sign of an end to the difficult industry conditions that have hurt the RV world over the past year. Demand is still weak for these highly consumer discretionary purchases, and Q3 sales fell 37% from last year's record haul.
"Market conditions continue to be challenging as dealers and consumers face increasing pressures," CEO Bob Martin said in a press release. Thor is seeing some of the biggest declines in the towable-RV segment, which soared through most of the pandemic. Sales in that division were down 57% in the period.
Staying profitable
These swings are a normal part of the industry, though, and Thor is making the best of the tough situation. The company used targeted promotions on 2022 models plus slower production rates for 2023 releases to help dealers reduce inventory levels. Price increases in other areas helped protect margins, meanwhile, keeping Thor in a profitable position. Pre-tax earnings landed at $367 million over the past nine months, or 4% of sales, compared to $1.1 billion, or 9% of sales a year earlier.
The company is generating ample cash, too, in part thanks to its flexible manufacturing approach that allows it to reduce costs quickly during downturns like this. Operating cash flow last quarter was $299 million, giving management resources it could direct toward things like debt repayment. "We remain committed to maintaining a strong balance sheet," CFO Colleen Zuhl said.
Stuck in neutral
Those financial wins help explain why the stock is beating the market this year after slumping through most of 2022. Thor has a good shot at generating positive earnings, even though the industry is contracting. In fact, management just raised its outlook on gross profitability and annual profit.
Investors are now much less worried about a devastating earnings decline, but that doesn't mean Thor isn't a risky stock. Management reduced its fiscal 2023 sales outlook for a second consecutive time, and sales are on pace to fall to about $11 billion from last year's $16 billion result. Thor generated over $12 billion in fiscal 2021, for context.
More risk-averse investors might want to watch this stock from the sidelines over the next few quarters, at least until sales volumes start to stabilize. The good news is that Thor's 2024 RV releases will likely arrive at dealerships that aren't strapped with too much inventory of prior-year models. Yet it's still too early to say whether the wider industry is ready to start growing again, following its post-pandemic slump.
