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Tickers in this Article: THO, WGO, HNZ, HOG
Recreation vehicle Thor Industries (NYSE:THO) followed the course this week by announcing strong profitability as a result of cost cutting. While the company experienced a modest increase in sales, the quadrupling of fiscal first quarter profit was mostly due to a lean operating structure.

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Quite Impressive
While improved profitability due to cost cutting is no surprise this year, Thor's numbers still come off on the impressive side. After all, this is a company that sells RV's, a rather expensive discretionary toy. Despite that fact, sales were lifted by 15% quarter over quarter. That sales increase is no small feat in this economic environment. Earnings per share were 42 cents compared to 9 cents per share a year ago.

Not Enough Anymore
One would think that such outstanding numbers would be enough to propel shares higher. Thor's earnings blew past analyst expectations yet the shares did not respond positively on the news. Considering shares have more than doubled this year, the market has more than priced in even this quality quarterly performance. Shares trade for around $29, or almost 20-times earnings if you annualize the fiscal first quarter figure, which a big stretch considering sales of RVs don't happen in a smooth straight line. (For more, check out Earnings: Quality Means Everything.)

Still, Thor is clearly doing significantly better than fellow competitor Winnebago (NYSE:WGO) which reported a quarterly loss in its most recent quarter. Recreational stocks are enjoying the market rally, with Harley Davidson (NYSE:HOG) now fetching nearly 30-times earnings and three-times book. These are lofty valuations going forward for businesses that sell pleasure items. Unless the U.S. economy suddenly becomes obsessed with consumption - which is very unlikely - these names will have a tough time going forward. Especially when you got quality names like Heinz (NYSE:HNZ) paying 4% and trading for 15-times earnings. (For more, see Value By The Book.)

The Bottom Line
Cost cuts have proven effective during this recession. Yet at some point, the other lever of profitability - sales growth - will have to take over.

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