Following second quarter results that showed further improvement from a year ago, Thor Industries (THO) stock retreated nearly 8% on Tuesday because it was not as impressive as analysts had hoped.  Thor, manufacturer of recreational vehicles and busses, swing to a profit of $11.9 million or 22 cents per share from a loss of $14.9 million or 27 cents a share last year.  Profit fell short of consensus estimates of 28 cents per share.  Revenue grew a whopping 90% to $430 million, which topped analysts’ estimates by $2 mln.  Considering sales were slightly better than inline, it was higher than expected costs that turned out to be the culprit for Thor’s disappointing quarter.

There is little doubt that the first half of the year has been far better in fiscal 2010 than it was in 2009, as EPS of $.65 per share easily topped the loss of $.18 in the prior period.  A quarter ago, Thor Industries returned to profitability in both RV’s and bus product lines, but the biggest turnaround has been in RV’s.  RV sales in the quarter rose 150% to $335.8 million, which has completed a six month turnaround of $64 million in net income compared to the first half of last year. The company has seen a relatively strong rebound in demand for RV’s (including the brand Airstream), which in combination with generally stable costs has boosted results.  However, the stock has already priced in the improved sales trends trading more than 270% higher than a year ago coming into the day.

According to our methodology, we view THO as Overvalued at the current price level, and the market’s historical valuation suggests the stock is overheated.  For example, on a price-to-cash earnings basis THO has normally traded for 13.5x to 31.8x, but the stock currently trades well above that historically normal range at nearly 40x cash earnings per share.  Now, we do understand that the company is returning to a more normal operating environment, and should see further normalization in the second half of the year.  However, the stock is now trading at not far from the price level achieved in 2006 and 200, when both sales and earnings were far better than they are today.

For long term investors, we would recommend looking elsewhere for a value stock because this one has already pulled away.  The worst days are hopefully behind them now as general economic improvement is great news for this stock (beta coefficient over 2), but it has been bid up aggressively already in the last year.  We will need to see further improvement to the underlying fundamentals or the price to decline below $30 before we consider upgrading THO.

Del Monte Foods (DLM) has extended its steady upwards trend today, but even after the impressive run of 84% in the last year, the stock may have further to rise.  While the stock has been on an undeniable tear, DLM’s fundamentals have advanced in proportion during that time.  We last wrote a note on DLM in December (Del Monte Foods Nearing New Highs and Still Cheap) after their last quarterly report in which they blew past analysts’ earnings estimates by 71% and raised guidance for the rest of the year.  Since that point, the stock has continued to appreciate nearly 20%, but again today they have beaten estimates and lifted guidance once again.

In the past quarter, Del Monte netted $59.4 million or 28 cents per share, which is slightly less than last year.  However, this quarter’s results were hampered by 6 cent per share in refinancing costs, and still they handily topped Wall Street’s view of $.21.  Revenue grew by 8% to $1.01 billion which was nearly doubled the growth rate expected by analysts.  This strong performance has prompted management to substantially lift full year guidance yet again.  Now, fiscal 2010 earnings are forecasted to come in at $1.07 to $1.11 versus previous guidance of $.93 to $.97.  The new forecast includes 11 cents of refinancing costs, whereas the previous forecast had allotted for only 5 cents.  Lower costs and better than expected sales growth are helping to expand gross margins from previous expectations of 10.6%-11.6% to 12.3%-13.3%.  Through the first nine months of the year, DLM has earned $.89 per share which is a substantial improvement to earnings of $.40 through this point last year.

Del Monte is seeing strong growth in both its Consumer Products division (mainly fruits and vegetables) as well as its Pet Products business as both saw sales increase by 7-8%.  However, the Pet Products was the bigger winner in the quarter with operating income jumping 19.3% due to cost controls and unit volume growth.  As for Consumer Products, increased spending offset the sales growth.

Coming into this week, we had an Undervalued stance on Del Monte and we are unlikely to downgrade it following this report.  Sales and earnings growth have consistently been much better than expected.  For example, in each of the last five quarters DLM has topped analysts’ estimates by a fairly wide margin each time.  They are grabbing market share in both divisions and in general costs and debt are falling, which are clear signs of a company running well.  The stock is trading over $13 on Thursday following the earnings release, but based on the current fundamentals we believe this stock could reasonably fetch $14 to $17.  So, value investors have not yet missed their opportunity in Del Monte.

The $300 pair of jeans is alive and well according to the fourth quarter results of True Religion Apparel (TRLG).  Quarterly earnings came in $.59 per share which was four cents better than Wall Street expected.  The better than anticipated earnings came on sales of $92.8 million which was far exceeded the estimates and was 27.1% higher than last year.  As for guidance for the year ahead, True Religion was mixed as they predicted earnings of $2 to $2.10 per share or slightly less than analysts’ expectations of $2.12.  However, revenue guidance called for $360 million which exceeds consensus estimates of $347.7 million.  The market shook off the slightly less positive earnings guidance and TRLG soared more than 18% on Thursday.

True Religion is striking while the iron is hot as they plan to open 27 new stores in the US and one in Canada in fiscal 2010, which adds to the 28 stores they opened over the past year.  These direct to consumer stores are a key piece of True Religion’s growth goals, as formerly they were sold mainly through the sales channels of high-end department stores and boutiques.  At the end of last year, they had a total of just 70 stores, so there would seem to be plenty of room for growth, but a product like this does run the risk at a certain point of losing the “boutique appeal” and cache.

Consumers’ tastes are notoriously fickle, so a brand that charges a premium price for their products must justify that status in the eyes of their customers.  It is a slippery slope for a business that can grow aggressively in near term, but it may in fact hurt their long term prospects.  For now, they are by all indications still one of the top brands for celebrities and the well-to-do, and I won’t suppose that I know much about fashion or how to run a clothing line.  As of the end of January, the stock had more than 30% of float shorted by the market, so some of today’s performance was spurred by short covering.  However, the analyst community is not siding with the bearish case, as stock has become somewhat of a Wall Street darling as the average analyst is quite bullish (average rating 1.3 on 1 to 5 scale according to Yahoo finance).

Financially speaking, True Religion’s growth has been outstanding since its humble beginnings as a public company in 2003.  Sales more than tripled between fiscal years 2005 and 2009, but growth rates have slowed as the company has matured.  At Ockham, we are reiterating our Fairly Valued stance on TRLG as of the most recent quarter’s results and the ensuing share price advance.  The stock is trading near the middle of its historically normal ranges of price-to-sales and price-to-cash earnings.  Based on current fundamentals and the company’s moderating growth, we believe a price of $29 would be a reasonable valuation. 

Just a year ago La-Z-Boy (LZB) appeared that it might become another casualty of the downturn in housing.  Three straight quarterly losses had brought the stock down under $1, but in the past twelve months business has turned around and the stock touched $13 per share today, its highest point since March of 2007.  Today, the stock traded more than 11% higher on extremely heavy volume.

After the close on Tuesday, La-Z-Boy reported net profit improved to $11 million or $.21 per share (or $.17 when stripping out one-time events) which compares favorably to the loss of a year ago of $64.5 million or $1.24 per share.  Consensus analysts’ estimates called for EPS of $.09 on sales of $276 million.  Revenue came in far better than expected, totaling $305.1 million or 5.7% better than a year ago.  The sales gains were fueled by double digit gains in their upholstery division, while the retail segment produced roughly flat sales.  Operating margins for upholstery and retail divisions where both improved thanks to cost savings and other operational efficiencies.  Furthermore, the company generated $22.7 million in cash from operations, which further strengthened its balance sheet.

Coming into the week, we had our neutral Fairly Valued rating on LZB, but following today’s appreciation it may be due for a downgrade in the coming week.  We can appreciate that there are improving trends, but at this point the fundamentals do not support this much appreciation–1300% in the last twelve months.  For example, historically speaking La-Z-Boy has attracted a price-to-cash earnings multiple of 12.9x to 35.1x, but following today’s advance it is getting very close to the high end of that range at about 33x.  Furthermore, the current price-to-sales valuation stands at .58x, which is higher than its historical range of .21x to .55x.

So, one could argue that La-Z-Boy has seen business improve from a year ago, but we are concerned that the market has begun to pay too rich a valuation for this stock.  In the firm’s press release, management stressed that they are still, “concerned about various economic factors, particularly unemployment and credit availability.”  Given this cautious view, we would expect more quarters of padding the balance sheet before they consider reinstating the dividend last paid in Nov. 2008.  The comfy furniture-maker has closed down underperforming stores and remains focused on cost savings, which will benefit the bottom line.  However, at this time and for the current level of fundamentals like sales and earnings, we would not see their shares as attractive unless they slipped back into the single digits.

“In Friday’s game plan, I told you to keep an eye on International Paper, which just reported its fourth quarter today. This manufacturer of all kinds of paper from loose leaf and industrial package and container board, is a fabulous indicator of the global economy’s health. Given the stock took a shellacking today, down 5.6%, you might think it’s signaling bad things about the recovery, not just its own business. Even with the tough decline, International Paper is up 4% since the last time we spoke to the CEO on September 25th. Then the stock was at $21.71.

What happened? Company earned 24 cents. That’s a penny better than Wall Street expected. It did have a 4 cent benefit from a lower tax rate. Some people would say it fell short of the bean counting analysts, what they were looking for.” — CNBC’s Mad Money 2/3/2010

Following the interview with International Paper (IP) CEO John Faraci, Cramer boasted that IP is currently the cheapest stock in the world and is “ready to roll”.  Of course, there is no way that this claim can be proven without the benefit of hindsight, but we beg to differ as we believe the current valuation is entirely fair.  Remember that the stock has nearly tripled in the last twelve months, and is about 6x higher than its lows for the year last March.  As Cramer mentioned they reported fiscal fourth quarter and full year 2009 results which at first glance appeared to be better than expectations.  However, the earnings beat was aided by favorable tax rates as sales were 8.7% lower than a year ago, and the market sold off in reaction.

Faraci noted that International Paper’s business is short-cycle and benefits from the initial signs of recovery, and that certainly seems to be the case for most basic materials bellwethers.  The first signs of recovery, no matter how faint, were about a year ago now (when we had the stock rated Undervalued) which somewhat explains the stock’s rapid rise.  Now, we are at the point where the market has rallied so strongly over the past year that current valuations are having a harder time being justified by the potentially slower than hoped recovery.  In our opinion, the past quarter was the weakest of their past year, and even the CEO himself admitted to being disappointed as his company, “left a few pennies on the table.”

At Ockham, we have the stock currently rated as Fairly Valued, and can think of many stocks that have a more attractive valuation than IP.  Cramer said that he has been following this stock for 30 years and believes the cash flow has never been more attractive.  We utilize cash earnings in our analysis which are reported earnings that strip out non-cash items rather than cash flow.  Our historical analysis shows that IP traditional trades for anywhere from 17.5x to 30.4x cash earnings, and the current price-to-cash earnings is within that range at 21.6x. 

IP has yet to start raising its dividend that was hacked when the company needed to conserve cash last spring.  Full year sales were down 5.5% from a year ago and the stock rose quite a bit last year, we think there are plenty of more attractive stocks for long term value investors.  Unlike Cramer, we found the CEO admitting sub-optimal performance in the last quarter a bit worrisome.  We would hold off unless the stock fell back down below $20, which would make the valuation far more attractive.