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Here's Why Investors Should Steer Clear of Thor (THO) Now

Of late, Thor Industries, Inc. THO has been witnessing softness in demand across its segments, along with increased raw material, labor, freight and warranty costs. Also, lower shipments and increase in overall net price per unit, due to changes in product mix and price, added to the woes.

The company, which designs, manufactures, and sells recreational vehicles (“RVs”) and related products through its subsidiaries, missed the Zacks Consensus Estimate in three of the trailing four quarters, with average negative surprise of 7.1%. Meanwhile, the company’s shares have declined 57.5% in the past year, comparing with its industry’s fall of 60.6%.

Let’s delve deeper and try to identify the factors affecting this Zacks Rank #5 (Strong Sell) company’s growth potential.

Dismal Performance: During the first quarter of fiscal 2019, its earnings and sales missed the Zacks Consensus Estimate by 15.8% and 6.1%, respectively. The poor performance was mainly due to lower revenues across its segments given softness in demand.

Also, earnings of 26 cents declined significantly from $2.43 per share recorded in the prior-year period. In fact, earnings (excluding acquisition-related costs) of $1.28 per share also decreased more than 47% year over year. The decline was mainly due to dismal top-line results, as well as higher raw material, labor, freight and warranty costs.

Although the company remains positive about both its short and long-term industry fundamentals, strong economic indicators and ongoing acquisition of Erwin Hymer Groupor EHG, we wait for better visibility.

Softness in Deliveries: At the end of the fiscal first quarter, Thor’s RV backlog decreased 50.9% from the prior-year quarter. During the fiscal first quarter, deliveries of total RV shipments declined 26.7% from the prior-year level. The downside was attributable to higher overall net price per unit due to changes in product mix and price.

Moreover, per a report of Recreation Vehicle Industry Association (“RVIA”), shipments in the calendar year 2019 will be approximately between 401,900 units and 51,300 units, 5.4% lower than the prior-year level.

Higher Costs, Pressurized Margins: Thor has been witnessing higher raw material, labor, freight and warranty costs over the last few quarters. Consequently, its margins are also declining significantly due to the above-mentioned factors.

During the fiscal first quarter, gross margins of 11.8% contracted 310 basis points (bps), primarily as a result of increased material cost due to higher discounting levels and warranty costs. The recent implementation of tariffs on various commodities and components, which are relevant to Thor's products, has negatively impacted the margins of the company. Due to these tariffs, some domestic suppliers have also raised the prices of many commodities.

Additionally, continuous freight and labor cost pressure are also causes of concern.

Estimates Trending Downward: Earnings estimates for fiscal 2019 have declined 22.1% over the past 60 days, raising concerns surrounding the company’s earnings growth potential.

The Zacks Consensus Estimate for fiscal 2019 earnings is pegged at $6.04 per share, reflecting a decline of 29.3% from the prior-year level. Also, sales are expected to decline 13.9% to 7.17 billion during the said period.

Stocks to Consider

Some better-ranked stocks in the Zacks Construction sector include Altair Engineering Inc. ALTR, Gates Industrial Corp. PLC GTES and Great Lakes Dredge & Dock Corp. GLDD, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Altair Engineering, Gates Industrial and Great Lakes’ earnings for the current year are expected to increase 23.1%, 44.6% and 111%, respectively.

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