 Good day, fellow investors! One of the stocks I received probably about 10 to 15 emails over the last six months that it is cheap, a value investment, a great investment is Tor Industries. However, the first email started coming in when the stock price was around 120 and the stock price now is 60 so ouch for those that sent me the email six months ago or more and Tor Industries is a cyclical stock and is a perfect example to explain or to show how a lot of value investors get trapped. So that's what we are going to do today and then we're going to see okay where is Tor in its market industry cycle now? Where would be the average? Is it still exuberant or below the average cycle valuation? When you find such investments below the average cycle valuation then it is a buy. So let's see. So the stock price 2016 boom exuberance went from 60 to 150, 160 and then it dropped during 2018 to the current levels of 60. Email started coming in at 120 so I really am sorry for the guys that invested heavily there during that times but let's see whether there is more risk, more potential or it's a really bargain and investment. There is one way how value investors get trapped. We have an extremely cyclical industry that makes the fundamentals look amazing at cycle peak. If you look at Tor's fundamentals earnings we see revenue growth from 2009 it was 1.5 billion to 2018 8.3 billion huge growth four times growth over what 10 years earnings per share went from 40 cents to 8 dollars amazing growth dividend went from 40 cents to 1.5 dollars so all the fundamentals looked amazing and with earnings per share in 2018 of 8 and the stock price between 100, 120 everybody was looking at this huge growth and then combining it with a peer ratio of 10 to 15 which made it an extreme bargain alongside the dividend. However then the next two quarters came and we'll see later about the last quarter and revenues dropped earnings halved after just two quarters so by the end of the year this will be at 0 to 2 perhaps even negative earnings and then there go your fundamentals so reality struck. They did make 1.6 billion in operating cash flows over the last 10 years but they also spent 927 billion on acquisitions not including the last acquisition so 1.6 billion operating cash flows if I take the average is 160 million which is three dollars per share times 15 valuation we are at 45 as an average cycle value we'll see later more about that the acquisition and positive every environment allowed for extremely high cash flows at cycle peak because people buy RVs really as luxuries at cycle peak when there is a recession slow down nobody buys them we'll see later so as I said second quarter 2019 sales dropped 43 percent which is a terrible terrible result gross profit dropped what 50 percent earnings per share went negative so very very leveraged extended sensitive two drops in sales and I think the same story happened with Tata Motors which was another company I received a lot of emails many saw a cheap price earnings ratio of 7 and high dividend yield when the stock price in this case in rupees was about 500 and then it was nothing but down as the stock price is now at around 200 still showing good fundamentals so the long-term chart of Tata is similar to TORS the only difference is that the exuberance with TOR was was much shorter so on the chart many just look at the drop from 150 to 60 and then say oh it's a bargain because it was 150 but please when you do such things just look at the longer-term chart and you will see that the stock price was around 50 around 60 for a long period between 2013 and 2016 which doesn't make it look like a bargain don't forget about the exuberance spike there and I get probably 10 emails per week about how this stock is cheap because it fell 50% but nobody watches how it was much lower or it went up 200 percent prior to that another trap unexperienced investors fall into now is TOR a good investment now so let's see about TORS cycle whether it is the stock price is below the average cycle value or still above the average cycle value inventories are huge inventory correction so sales have dropped dealers found themselves with a lot of inventory which is not good and sales have already been dropping for the industry for a year now and they're expected to drop more and really significantly we are looking at 2019 compared to the peak of 2017 it's a drop of 20 percent and we are still with the economy doing very well unemployment doing very well and interest rates okay have stabilized but look just an increase of 20 percent of interest rates have really smashed sales if interest rates go up or we see economic slowdown or consumer confidence declines then we are really really in trouble in 2009 RV sales dropped from almost 400 000 units per year in 2006 to 165 000 per year in 2009 and 247 000 240 2010 so those are drops of 50 60 percent in revenue which would really change things to for TOR then something that really changes the game for TOR is now at the late cycle at peak cycle they made an acquisition to grow in Europe the environment isn't growing in Europe but they expect I don't know what synergies growth etc as I look from the long-term chart RVs the RV industry in Europe isn't in a positive trend interest rates declined but sales haven't passed the 2010 peak and I'll explain you why for example this is where I was born Novigrad in Croatia and this was usually a camping site where would people bring their RVs park them and all these camping sites are now moving into this prepared homes which give you more comfort you don't have to pull you don't have to think about an RV and everything and probably for not much of a bigger price and you can see here this was all a camping site like we see on the right and now it's all with these high houses new houses mobile houses probably that are there on the left so in Europe I see a very negative trend for RVs and that's why the Heimer family was I think pretty happy to sell their business to TOR that leveraged themselves with what three billion and I don't know where they will see growth which is another very big risk for TOR which changes the party because if you don't have that inner recession you can survive you can shower with the bucket but if you have now that buying something that's probably you overpaid for then you are in trouble then their story 77 million households camping each year okay and then if just a small number of them decides to buy an RV which is not logical because camping needs for not bringing a big home so this is the message but when there is a recession wherein there is a slowdown this really gets bad and we can see that when consumer confidence drops the number of registration really drops by what almost 50% and you have to imply that into the cycle into your valuation into your calculation for the company going back to the acquisition they issued stocks they took three billion in debt three billion in debt which means to 150 million at least in interest costs per year if I look on the average cycle free cash flows let's take 200 2015 as the average even if things might be worse and forget about the exuberant last two years then we are 200 million in free cash flows put it a burden of 150 million put the difficult situation in Europe even if we see a recession there and my average value for the company is 100 150 million in cash flows from two to three four dollars per share in cash flows for dividends growth etc over the long term cycle which in this case lasted what seven ten years so that leads me to a cycle average price of 40 to 50 three to five dollars times 10 15 so okay so we are there 60 now but if I want a margin of safety then I want the stock price to be below the average cycle so let's say average cycle free earnings when there is a depression slowdown times 10 stock price 40 margin of safety below book value stock price below 20 and you might call me crazy but the stock price was there in 2012 2009 2003 so I would be careful with that exuberance because that's not value investing and I hope this shows you how a value investment analysis is done on such a stock that looks like a value investment so always remember exuberant point of the cycle what's the average and I want to buy when it's well below the average with a margin of safety so that I don't lose money no matter what happens at 60 I think perhaps it will be at the average so there is a lot of potential for down if the RV sector if the debt if the acquisition don't pan out as planned thank you for watching looking forward to your comments and I'll see you tomorrow in the news