A Quality Exec Comp Plan Lowers The Risk Of Investing In Thor Industries

Recap From July’s Picks

The Exec Comp Aligned with ROIC Model Portfolio (+10.0%) underperformed the S&P 500 (+11.1%) from July 14, 2022, through August 10, 2022. The best performing stock in the portfolio was up 29%. Overall, seven out of the 15 Exec Comp Aligned with ROIC Stocks outperformed the S&P 500 from July 14, 2022, through August 10, 2022.

This Model Portfolio only includes stocks that earn an attractive or very attractive rating and align executive compensation with improving ROIC. I think this combination provides a uniquely well-screened list of long ideas because return on invested capital (ROIC) is the primary driver of shareholder value creation.

New Feature Stock for August: Thor Industries
THO

Thor Industries, Inc. (THO) is the featured stock in August’s Exec Comp Aligned with ROIC Model Portfolio.

Thor Industries has grown revenue and net operating profit after tax (NOPAT) by 16% and 21% compounded annually, respectively, over the past ten years. See Figure 1. The company’s NOPAT margin rose from 4% in fiscal 2011 (fiscal year ends on July 31) to 8% over the trailing twelve months (TTM), while ROIC rose from 13% to 22% over the same time.

Figure 1: Thor Industries’ NOPAT & Revenue Growth: Fiscal 2011 – TTM

Executive Compensation Properly Aligns Executive Incentives

Thor Industries’ executive compensation plan aligns executives’ interests with shareholders’ interests by tying the payout of performance share units to a three-year ROIC performance goal.

Thor Industries’ inclusion of ROIC as a performance goal has helped create shareholder value through rising ROIC and economic earnings. Thor Industries’ ROIC improved from 9% in fiscal 2019 to 22% over the TTM, and the company’s economic earnings rose from $52 million to $870 million over the same period.

Figure 2: Thor Industries’ ROIC: Fiscal 2019 – TTM

Thor Industries Is Undervalued

At its current price of $93/share, THO has a price-to-economic book value (PEBV) ratio of 0.3. This ratio means the market expects Thor Industries’ NOPAT to permanently fall by 70%. This expectation seems overly pessimistic for a company that has grown NOPAT by 21% compounded annually over the past 10 years and 19% compounded annually over the past two decades.

If Thor Industries’ NOPAT margin falls to its ten-year average of 5% (vs. 8% TTM), and the company’s NOPAT falls 1% compounded annually over the next 10 years, the stock would be worth $120+/share today – a 29% upside. See the math behind this reverse DCF scenario. Should the company grow NOPAT more in line with historical growth rates, the stock has even more upside.

Critical Details Found in Financial Filings by My Firm’s Robo-Analyst Technology

Below are specifics on the adjustments I make based on Robo-Analyst findings in Thor Industries’ 10-Qs and 10-Ks:

Income Statement: I made $179 million in adjustments, with a net effect of removing $83 million in non-operating expenses (1% of revenue).

Balance Sheet: I made $663 million in adjustments to calculate invested capital with a net decrease of $307 million. One of the largest adjustments was $123 million (3% of reported net assets) in midyear acquisitions.

Valuation: I made $2.0 billion in adjustments, all of which decreased shareholder value. Apart from total debt, the most notable adjustment to shareholder value was $140 million in net deferred tax liabilities. This adjustment represents 3% of Thor Industries’ market cap.

Disclosure: David Trainer, Kyle Guske II, Matt Shuler, and Brian Pellegrini receive no compensation to write about any specific stock, style, or theme.