Scanning through Barchart.com data for unusual options activity midway through Friday's trading, I noticed that two of the country’s largest recreational vehicle (RV) manufacturers had put options in the top 100. 

The 20th most unusually active put option, with a volume of 974 against open interest of 136, is Thor Industries (THO), the world’s largest manufacturer of RVs. The 32nd most unusually active put option is Winnebago (WGO), with a Vol/OI of 5.26x. 

While both stocks have had a good year in the markets -- THO is up 44% year-to-date while WGO has a YTD return of 30% -- only one stock is worth buying. 

I’ll tell you who it is at the end.

Have an excellent weekend!

Thor Is the Bigger of the Two

The Indiana-based RV manufacturer is the bigger of the two companies, with a market cap exceeding $5.7 billion, nearly three times Winnebago’s.

According to Barchart.com data, the 11 analysts that cover Thor stock give it a Hold rating (3.18 out of 5) with an average target price of $92.57, 14.4% below where it’s currently trading. 

The company’s shares have had a topsy-turvy ride over the past five years, trading below $70 on several occasions while only testing $120 on two occasions within four months of each other in 2021. 

So, contemplating buying its shares at $108 seems like a terrible risk/reward proposition, especially given the weakness in its business, demonstrated by its results in Q3 2023 and for the nine months YTD.   

In the third quarter, Thor reported revenue of $2.9 billion, 37.1% lower than a year earlier. Its pre-tax income in the quarter was $155.5 million, 66.3% less than Q3 2022. For the nine months ended April 30, its revenue was $8.4 billion, 32.8% lower than a year earlier. Its pre-tax income was $367.4 million, 67.3% less than a year earlier. 

“Market conditions continue to be challenging as dealers and consumers face increasing pressures from the macro environment. In this difficult setting, we remain focused on executing our business model that enables us to quickly adapt to market conditions. Consequently, our performance during the fiscal third quarter was solid relative to broader market conditions,” stated CEO Bob Martin. 

Higher interest rates have hurt RV sales. They’re down industrywide by more than 50% in 2023. Economists suggest that this weakness is indicative of a struggling or sputtering economy. 

“RV sales are a ‘classic disposable income and interest rate sensitive item,’ as one economist puts it. In other words, when money is cheap and things are looking good for consumers, people borrow to buy an RV and hit the road,” Yahoo Finance recently commented on the health of the RV industry. 

How bad is business for Thor right now? It finished the third quarter with an order backlog of $5.5 billion, 60.4% lower than at the same time in April 2022. 

No backlog. No revenue. It’s that simple. 

What About Winnebago?

If the backlog is all you care about, there’s no question Winnebago is facing a slightly more dire situation. As of May 27, 2023, its backlog was $236.0 million, 82.0% less than a year ago. On a unit basis, it’s off more than 83%. 

Through the nine months ended the third quarter, its revenues were off by 48.9%, to $1.1 billion, while its adjusted EBITDA was $129.4 million, 60.9% less than a year ago.

One thing to remember: Winnebago’s backlog at the end of Q3 2023 was 22.0% of its revenue through the first nine months of 2023. That’s down from 62.4% a year earlier. Thor’s backlog was 65.4% of its revenue through the first nine months of 2023, down from 111.2% in April 2022. 

So, while Thor struggled to keep up with demand in 2022, it’s now facing a more manageable production environment. Not to mention, it’s still got a three-fold advantage over Winnebago regarding current demand.  

As for the balance sheet, Winnebago’s long-term debt, as of May 27, was $591.7 million, or a reasonable 28% of its market cap. Thor’s long-term debt was $1.6 billion at the end of the third quarter, also 28% of its market cap. The cash balance -- $353.2 million for Thor, 56% higher than Winnebago – is a big difference. 

In addition, Thor had a free cash flow of $353.2 million at the end of May, 3.7x more than Winnebago. Should the lack of demand carry into 2024, Winnebago is the likelier of the two companies to need a capital injection. 

The Bottom Line

Bigger isn’t always better. In this case, it helps to be the biggest of the bunch. 

From a valuation perspective, Thor is slightly cheaper by virtually every metric, despite the fact it’s up 44% YTD. I’d say both remain in value territory. 

However, going with the industry leader is better in these difficult times. 

The July 21 $105 put has a current bid price of $0.60. The put expires in seven days. It has an annualized yield of nearly 29%. At its current share price of $108.16, you likely wouldn’t have to purchase the shares so you would generate $6o of income for a week’s hold. 

A better play might be to find a put with a few more weeks to expiration and a lower strike price. This way, you can work an income play that lets you buy THO shares at a lower entry point.

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