Over the past six months, THOR Industries’s shares (currently trading at $71.95) have posted a disappointing 15.1% loss, well below the S&P 500’s 13.1% gain. This was partly due to its softer quarterly results and might have investors contemplating their next move.
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Why Do We Think THOR Industries Will Underperform?
Even though the stock has become cheaper, we’re passing on THOR Industries for now. Here are three reasons you should be careful with THO, plus one stock we’d rather own.
1. Revenue Spiraling Downwards
A company’s long-term sales performance is one signal of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, THOR Industries’s demand was weak and its revenue declined by 2.3% per year. This wasn’t a great result and is a sign of poor business quality.
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for THOR Industries, its EPS declined by 12.8% annually over the last five years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
3. New Investments Fail to Bear Fruit as ROIC Declines
We like to invest in businesses with high returns, but the trend in a company’s ROIC can also be an early indicator of future business quality.
Unfortunately, THOR Industries’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
THOR Industries falls short of our quality standards. Following the recent decline, the stock trades at 18.5× forward P/E (or $71.95 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better opportunities elsewhere. Let us point you toward our favorite semiconductor picks and shovels play.
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