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It’s been a little over a year since I wrote my “avoid” piece on Thor Industries Inc. (THO), and in that time, the shares have returned a loss of about 28.3% against a gain of ~8.65% for the S&P 500. Now, I’m as much of a fan of taking victory laps as any other contributor on Seeking Alpha, but I’m a bit more bold about it, and I will definitely be doing that here. More seriously, though, I did, and do like much of what’s going on at Thor, so I need to reconsider my position because a stock trading at $88.50 is, by definition, more compelling than that same stock when it was trading at $125. The company very recently announced earnings so it’s time to reconsider the investment. I’ll try to determine whether or not I should change perspectives by looking at the most recent financial history, and by looking at the stock as a thing distinct from the underlying business. Finally, as is my wont, I’m going to write about options. The short puts I recommended earlier did quite well, and it may be time to do a similar trade again. At the very least, writing about short puts in this case presents yet another opportunity to brag, so you gotta know I’ll be writing about them. I know such actions offend some of you, and it’s certainly had a very negative impact on my social life, but like the song says, “I gotta be me.”
You may have gotten a sense of my writing style already, dear readers, and you’d be forgiven for not preferring it. If you’re in the category of people who want to read what I think, but don’t want to deal with tiresome, self aggrandizing screeds of a 55-year old man-baby, then this paragraph is for you. This is the ubiquitous “thesis statement” paragraph that I insert into each article as a way to help insulate people from the “Doyle mojo.” It’s here where you get the “gist” while being insulated from most of the tedium. I’m of the view that Thor is now a buy. The company has performed well, and I think the dividend is reasonably well covered for the foreseeable future. At the same time, the stock is trading at levels lower than when I became bullish on the name previously. It seems that my bullishness is echoed by insiders who’ve just spent nearly $2.3 million buying shares for themselves. Finally, I’ll be expanding the whiskey acquisition fund with more short put options, and I would recommend this or a similar trade. There you have it. As I typically type at the end of this, I don’t want to hear any moaning about my tedious writing style, or the fact that I spell words like “flavour” and “behaviour” properly when you could have just as easily avoided all that by reading the bullet points, and this paragraph. So, if you read on, that’s on you.
Post Thesis Statement Soapbox
I anticipate people arguing that it’s silly to take a bullish perspective at this point because demand will inevitably slow. I understand, and agree with that perspective, but that’s not really the point. The question is “by what amount will demand have to be destroyed for the valuation to be driven to extremes?” In other words, how much will the “E” in the PE ratio need to deteriorate to bring the relationship between price and value back to a more normal level? Let’s suppose that earnings are cut in half over the next year. Holding all else constant, that would drive PE to ~11. I’d still be comfortable holding a company that traded at that valuation.
In my view, this perspective is relevant and important for people to grasp. I’ve poked fun at the “we’re not buying stocks we’re buying businesses” perspective frequently recently, but I’ll admit that there’s a very deep truth to it. If you paid $1,000,000 for a private business that spins off $200,000, you wouldn’t abandon it simply because it hit an inevitable soft patch and only produced $100,000 of profits until the inevitable uptick in business. All businesses hit a soft patch. So in this case, the “business vs. stocks” argument is very wise. In my view, we buy the stock, acknowledge that the business cycle is real because we live on Planet Earth, and hold it through ups and downs. I’ve got a reputation in some quarters as being a bit of a trader, but I only ever abandon a stock when I think the crowd is getting excessively optimistic about it.
Financial Snapshot
In my view, this has many of the characteristics of a growth business. For example, from 2013 to 2021, revenue grew at a CAGR of ~16% and net income grew at a CAGR of ~17%. Zooming into the very recent past, the growth story remains very much intact in my view. Specifically, revenue was up just under 49%, and net income was up over 100% (!) from the year ago period. At this point, a dark thought may be festering in your minds, though, dear readers. You may remember something about this global pandemic that we called “Covid”, and how it turned the global economy upside down in 2020. Thus, any comparisons to that awful year may look a bit too rosy. If that’s your perspective, allow me to banish that dark thought from your minds, because the most recent six months were better than the same period in 2019, too. Specifically, revenue was most recently about 88% higher than the most recent pre-Covid period, and net income was about 540% greater. Management has seen fit to reward shareholders by increasing the dividend yet again. I’m generally impressed by all of this.
It’s not all animated bluebirds and rivers of whiskey at Thor, though. The level of debt has obviously ballooned over the past year, and I think investors need to be compensated for that deterioration in the capital structure. In my view, these are venial sins, though, as I don’t think the debt threatens the dividend here.
Speaking of the Dividend
Now, the recent financial history here may be interesting to you, and if that’s the case, I would recommend expanding your horizons a bit because there are one or two more things in this life more interesting than financial history. Investors are generally more interested in the future, though, for obvious reasons. One of the things that’ll impact the future of a given stock is the sustainability of its dividend. Because I’m downright obsessed with making your lives easier, I want to spend some time writing about the dividend. Although I’m as much of a fan of accrual accounting as any “sometimes sober” person can be, when it comes to tracking the sustainability of a given dividend, I remove my “accrual accounting” dunce cap and don my “cash flows” dunce cap.
In particular, I want to compare the size and timing of future calls on cash to the current and likely future sources of cash. First, I’ll write about the size and timing of likely future obligations. I’ve plucked the following table from page 49 of the latest 10-K for your reading pleasure. Please note that this document is now six months old, so we’re half way through the fiscal 2022 column. Most relevant to me, then, is the FY 2023-2024 column. The company doesn’t break these down by year, but using the skills not so lovingly imparted to me by the good people at Holy Spirit School many decades ago, I work out that the company will need to spend an average of $95 million in each of the next two years. It then balloons to an average annual rate of ~$831.5 million in the following two years. This jumps because of the $1.543 billion that’s due in the year ending July 31, 2026.
Thor Contractual Obligations (Thor lastest 10-K)
Against these obligations the company has about $305 million in cash and equivalents. Additionally, they’ve generated an average of $525 million in cash from operations over the past three years, while spending about $792 million on CFI activities. That CFI figure is skewed higher by acquisition costs over the past three years, though. Stripping these out, a more “typical” CFI for this business is ~$136 million. All of this suggests to me that the annual dividend payment of ~$90 million is reasonably well covered, to 2025 at least. For that reason, I’d be very happy to buy this stock at the right price.
Thor Financial History (Thor Investor Relations)
The Stock
Some of you who follow me regularly know that it’s at this point in the article where I turn into a real downer because I start yammering on about how companies you like can be terrible investments if you overpay for them. The fact is, the business is an organisation that sells stuff, hopefully for a profit. The stock is a proxy for that business, and its price changes are governed by changes in the mood of the crowd. This is why I look at stocks as things apart from the underlying business. At the risk of boring you even more than usual, I’ll stop trying to make this point theoretically and will use Thor stock itself to demonstrate. Since the company just released earnings, I’ll need to review what happened to the stock during the quarter before last. The company released earnings on December 8, 2021. Had an investor bought the next day, they’d be down by about 13.8% since. Had the investor waited approximately three months (i.e. just before the latest release), they’d be up about 7%. During that quarter, not much changed to warrant a near 21% swing in returns. The investors who bought virtually identical shares more cheaply did better than those who bought the shares at a higher price. This is why I try to avoid overpaying for stocks.
I measure the cheapness (or not) of a stock in a few ways, ranging from the simple to the more complex. On the simple side, I look at the ratio of price to some measure of economic value like sales, earnings, free cash flow, and the like. Ideally, I want to see a stock trading at a discount to both its own history and the overall market. In my previous missive, I became bullish on this stock “back in the day” (as the young people say) when the price to free cash flow was just under 12 times. It’s significantly cheaper than that now, per the following:
Data by YCharts
Source: YCharts
I left the party in June 2020 when the PE was 24.5 and continued to avoid the stock when the PE was 24.12. It’s now significantly cheaper, per the following:
Data by YCharts
Source: YCharts
In addition, with the exception of spikes in 2019 and 2020, the dividend yield is near the high end of the historical range, per the following:
Data by YCharts
Source: YCharts
It seems that at the moment, investors are paying less, and getting more. That is something I like to see. Given the above, I’m quite confident buying shares at the current level.
But Wait, There’s More…
I think insiders have insights into the companies at which they work that the rest of us, including Wall Street analysts, will never have. For that reason, if these people put their own capital to work in that company, we should pay attention. With that in mind, allow me to draw your attention to recent insider buying activity at Thor. Since the middle of last December, three individuals spent just under $2.3 million of their own capital to acquire 22,500 shares of the company at prices ranging from $98.54 to $104.75. If the people who know this business best are on the same side of the table as me, my level of confidence in the trade rises dramatically.
And Even More: Options
In my previous missives on this name, I recommended selling put options. In terms of specifics, I recommended selling the January 2021 puts with a strike of $60 for $2.95. I sold 5 of these. Later on, I recommended selling the September 2021 puts with a strike of $80 for $3.40. I sold 5 of these also. I was never exercised on these, but would have been glad if I were, so I consider it a successful outcome.
I like to try to repeat success when I can, so that is what I’m going to do. In terms of specifics, I want to write the September Thor puts with a strike of $60. These are currently bid at $2.60. If I sell these, and the shares remain above $60 over the next six months, I’ll simply add $2,600 to the $3,175 already earned from selling puts on this name. That will, of course, be a welcome addition to the whiskey acquisition fund. If the shares fall in price, I’ll be obliged to buy, but will do so at a price ~32% below the already cheap level. This also lines up with a dividend yield of just under 3% which I also consider to be quite decent.
Deep breath. I think this article has been too upbeat so far, too full of optimism and hope, and that just won’t do. It’s time for me to spoil the mood a little by writing about the risks associated with short put options. I characterise them as “win-win”, but you might be forgiven for suggesting that’s a bit of hyperbole. The fact is that short put options, like everything in life, come with risk. The short puts that I consider to be ‘win-win” are a small subset of all short puts. I consider a short put to be a “win-win” only when they’re written on a company that I would be happy to own at a price I’d be happy to pay. So, not all puts are “win-win” trades. If the strike price is a terrible entry price, for instance, that’s a very bad trade in my view.
I should also state that I think the risks of put options are very similar to those associated with a long stock position. If the shares drop in price, the stockholder loses money, and the short put writer may be obliged to buy the stock. Thus, both long stock and short put investors typically want to see higher stock prices.
Some put writers don’t want to actually buy the stock – they simply want to collect premia. Such investors care more about maximizing their income and will be less discriminating about which stock they sell puts on. To be very clear, I am not such an investor. I like my sleep far too much to sell puts based only on the income I can generate. I’m so much of a coward that I’m only willing to sell puts on companies I’m willing to buy at prices I’m willing to pay. I wasn’t always so disciplined, but after painful losses, I decided to only ever sell puts on quality companies at prices I was willing to pay.
In case I haven’t written enough about it at this point, I should also point out that I think put writers take on risk, but they take on less risk (sometimes significantly less risk) than stock buyers in a critical way. Short put writers generate income simply for taking on the obligation to buy a business that they like at a price that they find attractive. This circumstance is objectively better than simply taking the prevailing market price. This is why I consider the risks of selling out of the money puts on a given day to be far lower than the risks associated with simply buying the stock on that day.
I’ll conclude this rather long, meandering discussion of risks by looking again at the specifics of the trade I’m recommending. If Thor shares remain above $60 over the next six months, I’ll simply pocket the premium and move on. If the shares fall in price, I’ll be obliged to buy, but will do so at a price that lines up with a 3% dividend yield, and is significantly cheaper than the already discounted price. All outcomes are very acceptable in my view, so I consider this trade to be the definition of “risk reducing.” If you think me strange for ending a discussion of risks by writing about the risk reducing potential of put options, guess what. You’re neither the first, nor will you be the last. I’m comfortable with that.
Conclusion
I think Thor Industries Inc. is a very compelling investment at current prices. The shares are very cheap relative to the recent performance. It’s fair to say that they’re near record lows. Additionally, if earnings collapsed, the shares would remain reasonably priced in my view. Additionally, insiders are “talking with their wallets”, and have spent just under $2.3 million of their own money buying stock over the past three months. Finally, I think the dividend is reasonably well covered for the next few years. For those who are skittish about buying at current prices because of fears of a market correction, I would recommend selling the puts described above or a similar trade. In my view, these offer great returns for even lower risk. For my part, I’ll be both buying stock and selling puts, and I think investors who do either or both will be glad they did.
Source: https://seekingalpha.com/article/4494937-backing-up-the-truck-on-thor-industries-inc
