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baird_new_logoEditor’s Note: Here are highlights of the latest market newsletter from Robert W. Baird & Co. following release Monday of the first quarter financial results for Thor Industries Inc.

Reports upside on cost controls as backlog builds. Thor topped expectations on aggressive cost management. Following an impressive Q4, the results support the idea that stronger margins are sustainable. Meanwhile, we anticipate a robust recovery as dealers replenish depleted inventory. We are raising our estimates to reflect more confidence in our outlook – and would look for opportunities to accumulate on broader market weakness.

Summary

  • Cost cuts drive EPS upside. Thor topped expectations, reporting EPS of $0.42 versus our $0.38 estimate ($0.35 consensus). Recall that Thor had previously reported preliminary sales results – so the upside is all on the cost side. EBIT margin improved to 6.9% from 1.3% (+70bp versus our model) as management made aggressive cuts to ensure profitability just as orders began to build. Notably, Thor turned a profit in all segments, including motorhomes.
  • Order backlog supports robust recovery. With the RV backlog up 153%, we continue to expect a robust wholesale recovery. Dealer inventory bottomed in August, in our view, indicating that the long destocking cycle had run its course. We see F2010 total Thor wholesale units up 41% to 64K, but still well below the F2006 peak of 120K units.
  • Raising EPS estimates. The improved results leave us more comfortable with the idea that operating margin could approach 7%, an amazing feat considering that margin peaked at 8% in F2006 when revenue hit $3.1 billion (versus $2.0 billion in F2010E). We are raising our F2010 EPS estimate to $1.55 to reflect this outlook.
  • New leadership. Founder and former Chairman and CEO Wade Thompson passed away in November. Wade was an exceptional leader and will be missed. His longtime partner and former Vice Chairman Peter Orthwein was named Chairman and CEO to replace Mr. Thompson. We expect Mr. Orthwein to maintain the decentralized culture that has been integral to Thor’s success.

Details

RV field trip. We are hosting investors at the 47th annual RVIA Trade Show in Louisville this week. It is our eighth consecutive year. This year, we are meeting with Thor, Winnebago, Drew Industries, Heartland RV, Altmans Winnebago, Freedom Roads RV, Bank of America and many other vendors. With orders up and improving consumer confidence, we expect a brighter mood this year (last year was depressing).

Estimates. We raised our F2010 EPS estimate to $1.55 from $1.48 on an improved margin outlook. We raised our Q2 EPS estimate to $0.22 from $0.21. We also raised our F2011 EPS estimate to $1.85 from $1.67.

Wholesale and Retail. Towable shipments have increased for three straight months, while retail declines continue to moderate. As conditions improve and comps ease, we expect to see the trend continue.