Camping World Holdings, Inc. (CWH) is a leading RV and outdoor equipment provider, and a quick look into the company’s financials and valuation will reveal some reasons why it remains a controversial choice amongst investors.
Business Model & News
Camping World is the largest RV dealer in the United States, offering both new and used vehicles and RV-related gear (furniture, camping items, etc.) via a large national sales network. As of 2021, Camping World has more than 50 years of RV industry experience, 185 retail locations across the U.S, and 5.5M active customers. From a strategy perspective, management looks to establish Camping World as a one-stop-shop solution for anything RV-related, through a comprehensive product solution range.
Camping World operates two reportable segments: Good Sam Services and Plans, and RV and Outdoor Retail. As shown below, new and used vehicle retail sales account for more than 70% of total revenue, driving the company’s business operations. On the other hand, the Good Sam segment displays greater margin capacity, extending the company’s overall profitability profile as it increases in size.
In more recent news, Camping World recently announced the acquisition of Richardson’s RV Centers on May 23, 2022. The transaction represents the largest acquisition in the company’s history, with the agreement including eight sales locations in California and Indiana, five current dealership locations, one future dealership location, and two parts and service centers.
While the COVID-19 pandemic significantly limited traditional travel accommodation, the camping and RV industry saw a spike in consumer interest, with first-time customers entering the space. Even before the pandemic, however, industry trends have been mostly favorable. Camping demand has been moderately increasing for the past decade.
According to the RV Industry Association report, the number of Camping Households has increased at a CAGR of 3.0%, since 2014, while the number of active Camping Households has increased by 7.1% CAGR over the same time period. This indicates both an overall increase in customers and an elevated potential spending capacity for existing ones. Also, according to the North American Camping Report, RVs were the preferred accommodation for about 25% of all campers, pointing to a large, growing total addressable market for the company.
In order to keep up with elevated demand, RV shipments have also increased since 2009, with the 2021 year marking a breakout. More specifically, RV wholesale shipments have increased at a CAGR of 11.1% over the 13 years, with over 90% of shipments belonging to the Towable category. The 2021 RV Owner Demographic Profile report estimates there are approximately 11.2M million households that own RVs (8.7% of all US households). This number has increased from 7.4% of U.S. households in 2011.
With the overarching macroeconomic trends remaining positive for the industry, strong financial performance should be expected of the market leader. Indeed, revenue has grown at a 14.26% CAGR over the last 5 years, with operating income growth even higher, at 22.76%. Net income over the same period has increased at a 10.07% annualized rate.
Gross margins have significantly increased over the last few years, surpassing the 35% mark in 2021. Top-line profitability falls in the consumer discretionary average range of around 36%. Net income margins, on the other hand, remain low, at 3.7%, compared to the almost double sector average. Bottom-line profitability remains one of the main long-term concerns for the business.
After further examining the financials of the company a few other concerns arise as well. While liquidity is strong, with a current ratio over 1.3, long-term debt is also gradually increasing, reaching $1.4B in 2021. The company has also significantly increased its capital lease liabilities, currently amounting to almost $850 million.
Increasing financing costs can further hurt the company’s slim net profit margins. Dilution is also an imminent threat for investors, as shares outstanding have significantly increased over the last few years.
One of the main areas of concern for Camping World lies in its Cash flow productivity. Fluctuating from $750 million, all the way down to negative territory, cash from operations generation remains inconsistent.
Over the trailing twelve months, a large increase in inventory worth more than $900 million has been recorded, paired with the corresponding cash outflow. While advantageous in the scenario that demand remains very high, loading up on inventory could also prove destructive, in the case of a slowdown, or worse yet, a recession.
When it comes to valuation, there is little doubt that Camping World is inexpensive. At just 4x P/E, 5.1 EV/EBITDA, and 0.2x P/S multiples it is hard to find cheaper stocks around, even in today’s market. While the 9.5% dividend yield is not exactly safe, given the free cash flow production struggle affecting the company, it is, still, a welcomed offering. During the latest earnings call, management bolstered their claim that they plan to further increase dividends over time, and commit to repurchasing shares.
The company’s valuation, while very modest, stands in line with that of Camping World’s major competitor, Lazydays Holdings (LAZY), trading at 3.2x P/E, 3.5x EV/EBITDA, and 0.2x sales. LAZY’s valuation actually appears even less expensive, granted, however, that the company pays no dividend. What this comparison probably shows better than anything else, is that, the RV industry is undervalued.
Battling A Massive Short-Position
Camping World is one of the most heavily shorted equities currently trading on the U.S stock market. According to MarketWatch, about 42% of the stock’s float represents short positions. While this indicates an elevated risk profile, and perhaps a lack of faith by institutional investors in the company’s business and operating model, it could also prove beneficial for investors if a short- squeeze were to be triggered.
Wall Street’s Take
Turning to Wall Street, Camping World has a Moderate Buy consensus rating based on four Buys, three Holds, and zero Sells assigned in the last three months.
The average Camping World price target is $36.43, which represents a 32.86% upside potential from current price levels, with a high forecast of $50 and a low forecast of $26.
After all things are considered, Camping World offers an attractive value proposition, yet a risky one. Financial concerns, namely profitability, FCF productivity, and increasing leverage, might dishearten more conservative investors. A large short-position also indicates elevated risk levels, over the long and short-term. While at current price levels the stock might be too cheap to ignore, still, the downside risk is high.
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