Global

A Side-by-side Analysis of Thor Industries, Inc. (THO) and Flowserve Corporation (FLS)

Thor Industries, Inc. (NYSE:THO) shares are down more than -34.65% this year and recently decreased -2.06% or -$2.07 to settle at $98.49. Flowserve Corporation (NYSE:FLS), on the other hand, is down -1.33% year to date as of 06/13/2018. It currently trades at $41.57 and has returned -0.81% during the past week.

Thor Industries, Inc. (NYSE:THO) and Flowserve Corporation (NYSE:FLS) are the two most active stocks in the Recreational Vehicles industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.

Growth

Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect THO to grow earnings at a 17.00% annual rate over the next 5 years. Comparatively, FLS is expected to grow at a 7.00% annual rate. All else equal, THO’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 11.9% for Flowserve Corporation (FLS). THO’s ROI is 21.70% while FLS has a ROI of 5.90%. The interpretation is that THO’s business generates a higher return on investment than FLS’s.

Cash Flow



The amount of free cash flow available to investors is ultimately what determines the value of a stock. THO’s free cash flow (“FCF”) per share for the trailing twelve months was +1.59. Comparatively, FLS’s free cash flow per share was -1.21. On a percent-of-sales basis, THO’s free cash flow was 1.16% while FLS converted -4.32% of its revenues into cash flow. This means that, for a given level of sales, THO is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Balance sheet risk is one of the biggest factors to consider before investing. THO has a current ratio of 1.70 compared to 2.30 for FLS. This means that FLS can more easily cover its most immediate liabilities over the next twelve months. THO’s debt-to-equity ratio is 0.04 versus a D/E of 0.93 for FLS. FLS is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

THO trades at a forward P/E of 9.74, a P/B of 2.78, and a P/S of 0.60, compared to a forward P/E of 20.49, a P/B of 3.22, and a P/S of 1.46 for FLS. THO is the cheaper of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. THO is currently priced at a -32.89% to its one-year price target of 146.75. Comparatively, FLS is -7.93% relative to its price target of 45.15. This suggests that THO is the better investment over the next year.

Risk and Volatility

Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. THO has a beta of 1.39 and FLS’s beta is 1.43. THO’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment




Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. THO has a short ratio of 4.11 compared to a short interest of 6.90 for FLS. This implies that the market is currently less bearish on the outlook for THO.

Summary

Thor Industries, Inc. (NYSE:THO) beats Flowserve Corporation (NYSE:FLS) on a total of 12 of the 14 factors compared between the two stocks. THO is growing fastly, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, THO is the cheaper of the two stocks on an earnings, book value and sales basis, THO is more undervalued relative to its price target. Finally, THO has better sentiment signals based on short interest.

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