THOR Industries has had an impressive run over the past six months as its shares have beaten the S&P 500 by 8.3%. The stock now trades at $84.66, marking a 12.5% gain. This performance may have investors wondering how to approach the situation.
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Why do we think THOR Industries will underperform?
Despite the momentum, we’re cautious about THOR Industries. Here are three reasons why there are better opportunities than 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 put up a good quarter or two, but many enduring ones grow for years. Over the last five years, THOR Industries’s demand was weak and its revenue declined by 4.8% per year. This was below our standards and signals it’s a low quality business.
2. EPS trending down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for THOR Industries, its EPS declined by 22.1% 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. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final judgment
THOR Industries falls short of our quality standards. With its shares beating the market recently, the stock trades at 21.2× forward P/E (or $84.66 per share). This multiple tells us a lot of good news is priced in - we think there are better stocks to buy right now. We’d suggest looking at a dominant aerospace business that has perfected its M&A strategy.
Stocks we like more than THOR Industries
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