|Shares Out. (in M):||88||P/E||0||0|
|Market Cap (in $M):||2,143||P/FCF||0||0|
|Net Debt (in $M):||2,000||EBIT||0||0|
Camping World Holdings (CWH) is a Recreational Vehicle (RV) retailer whose industry is seen to be very cyclical and highly influenced by the economy and interest rates. However, the ongoing trend of higher RV shipments has allowed the company to expand its footprint and revenues. With its focus on diversifying its revenue segments, Camping World’s business model provides some downside protection, as well as operational leverage.
Recreational Vehicles have become a lifestyle choice for two distinct and contrasting generations: The Baby Boomers, who use RVs as an affordable platform to travel the United States during their golden years, and the Millennials, looking to follow in the footsteps of Jack Kerouac and crisscross the country in search of new experiences. The main difference between the two generations is the vehicles they choose. The Millennials RV of choice is the towable travel trailer that attaches to a standard SUV or truck with an entry price of ~$22,000, whereas the Baby Boomers lean towards luxury and comfort and choose the Motorhome that starts around $75,000 and can reach upwards of $750,000. Sandwiched between these two generations in both age and the RVs they use is Gen X (generation X).
An RV dealership does not have the same limitations as an auto dealership. Because RV dealerships can sell multiple manufacturer brands at the same location and do not require a license/permission from the manufacturer, the barriers to entry are very low. However, the success of the dealership is solely up to the management and its salespeople and not the brand. Most automobile buyers have narrowed their choice to a brand and style before entering a dealership, whereas RV customers are more reliant on the knowledge of the salesperson to steer them to the right unit.
Since the financial crisis, RV shipments have increased more than 13% annually and have grown over 14% during for the first three months of 2018. It is obvious that a good portion of that growth over the past 9 years has been fueled by low gas prices and interest rates. But another major factor is that the mobile economy has helped create an untethered lifestyle. Keeping in touch with family and friends, paying bills, shopping, and even being able to work remotely can easy be completed on a laptop, tablet or phone while relaxing in an RV.
Over 9 million households in the US own a recreation vehicle, which is up over 20% since 2001 and 70% since the early-1980s when the economy was hit by rising gas prices and interest rates that peaked over 20%. By the late 1980s/early 1990s, RV manufacturing had recovered and was expanding, leading to an increase in dealerships nationwide. Today, the RV dealership market is very fragmented with over 1200 dealers dedicated to RV sales. Most of these dealerships are “Mom and Pop” operations who got into the business 30 years ago and are now looking for an exit strategy.
Recreational vehicle ownership used to be focused primarily on retirees with most of the attention placed on luxury and comfort. After the recent financial crisis and with gas prices still rising, RV manufacturers, like Thor Industries, began concentrating on manufacturing lighter, less costly trailers that could easily be pulled by a standard SUV. Not only did this improve towable sales, but it also attracted a new and younger segment of RV buyers. Today, RV ownership is concentrated between the ages of 35-64, with the median buyer being 45 years old and making over $75,000, while the fastest growing demographic of ownership is between 35-54.
The average RV owner trades-in their unit every 4-5 years and tends to trade-up, especially when trading-in an entry-level unit; expanding sales to the Millennial generation allows for the possibility of additional 2+ trade-ins over their lifetime. The increase in RV purchasing by Millennials has also prompted the growth of companies like Outdoorsy, Mighway, and Campanda, which allows RV owners to rent their RV for daily, weekly and monthly trips when not being used. Even some entrepreneurial homeowners throughout the country have been buying RVs, parking them on their driveways and renting them out through Airbnb.
Camping World Holdings (CWH), through its dealership/retail locations and e-commerce platform, sells new and used recreational vehicles, RV maintenance services and repair parts, RV accessories and supplies, and RV protection plans and financing. In addition, CWH also generates revenue through its Good Sam yearly membership fees and additional services. For $27/year, members can purchase or have access to extended vehicle service contracts, emergency roadside assistance, property and casualty insurance programs, and travel protection and financing. Good Sam’s membership has grown steadily to over 1.85 million members and acts as both a loyalty program for CWH while providing steady recurring revenue. With a network of over 140 dealerships and retail locations in 36 states, CWH has grown into the largest provider (by a wide margin) of RV vehicles, goods and services while it continues to grow its footprint primarily through acquisitions.
Camping World’s diversity of revenue provides steady income during periods of solid demand and counter-cyclical revenue during economic slowdowns. New and used vehicle sales, as well as Financing & Insurance, account for over 80% of the company’s revenue and 68% of its yearly profits. Consumer services & plans (Good Sam), and Parts & Services, which focuses on existing RV owners, accounts for 20% of revenue and the remaining 32% of the profit. During a downturn, Camping World has observed that most Good Sam members keep their membership current as they continue to take trips (fewer in number) and want to maintain the extended warranties, roadside assistance, travel protection and insurance that is offered through the membership. Existing RV owners will also continue to service their vehicles during a downturn in the economy which benefits Parts and Services. Fewer trips also mean that many of the insurance and warranties written become more profitable, as there are fewer claims during declining travel.
A downturn in economy, rising interest rates and gas prices will all lead to a drop-off in new and used RV sales, along with the very profitable financing and insuring of those units. Just because Camping World generates revenue from diverse business segments does not mean it is immune to a downturn in the economy. However, unlike its peers, the company would benefit in the long-run as it would be able to acquire existing dealerships very cheaply, and in rare cases for the cost of the inventory and taking over the lease as it did in 2008. In the short-run, a small amount of the revenue decline in new and used RV sales would be offset by a decline in commission to salespeople, lower inventory held at each dealership, and lower floor plan leasing expenses; this would not be enough to offset the decline in revenue, but it would provide a bit of relief.
Opening new retail and dealer locations helps expand the number of potential connections and increases the membership in Good Sam. With a database of over 15 million contacts, 3.6 million of them active customers, and 1.85 million Good Sam members, Camping World has an open channel to communicate directly with potential buyers, cross-sell its products and services, gain insight into which products to retail and where, and determine new dealer locations.
In the past, Camping World has made acquisitions of other dealers to expand its footprint. The company knows which states it wants to penetrate and/or expand its network and how much it is willing to pay to enter those markets. If the acquisition will not be accretive within the first year after the deal closes, is too expensive, or if CWH will not be able to fully leverage its infrastructure and the Good Sam brand, Camping World will look for another way into the market. That was the main reason for acquiring Gander Mountain out of bankruptcy in May of 2017. At first blush, it appeared that Camping World was expanding into the outdoor sporting goods segment as a complement to RV revenues. But at a conference in June 2018, Camping World announced that acquiring Gander Mountain and its retail leases was a cheaper, faster and more efficient way to gain a “backdoor” into several states it was looking to penetrate. Besides Gander Mountain, Camping World has made several outdoor and sporting goods purchases over the past year: Active Sports, W82, Uncle Dan’s Outfitters, and Erehwon Mountain Outfitter. The main motivation for these acquisitions was to continue to build the Good Sam membership through cross-selling brands, expand product offerings and retail locations, and loyalty. The newly reopened Gander Mountain stores will be focused on increasing RV sales and services and Good Sam memberships while continuing to service outdoor sports enthusiast.
Camping World’s growing network of dealerships/retailers provides significant benefits that most of its competitors cannot realize. Nearly 80% of the company’s RVs are supplied by Thor Industries, 12% come from Forest River, and 7% Winnebago. Because of its size, CWH represents 20%, an estimated 13%, and 10% of Thor’s, Forest River’s and Winnebago’s yearly shipments, respectively. Being a key player to the top RV manufacturers translates to more competitive wholesale pricing, volume discounts, and better order fulfillment. Because all CWH’s dealerships use the same inventory platform, any e-commerce shopper or salesperson has access to Camping World's complete inventory. The company has also been thoughtful when it comes to its vendors. Camping World has purposely kept the number of financing and insurance suppliers limited to only a handful of companies. This means that CWH will be a bigger portion of each company’s operations and will benefit from more attractive financing, insurance, and floor plan leasing rates and fees than its peers. Advertising and direct marketing costs also benefit from having a nationwide dealer network, as the costs and benefits can be spread across a growing footprint.
The market’s primary way to value a company is to group it with its peers to determine if it is cheap or expensive. The problem is that there is not another public RV dealership. Depending on which website or service you use, Camping World is grouped with RV manufacturers (Thor Industries and Winnebago), auto dealers (AutoNation and Carmax), auto parts retailers (Autozone, O’Reily, and Advanced Auto Parts), and I have even seen them compared to outdoor sports retailers (Dick’s and Big 5 Sporting Goods). Camping World is currently trading at an 8.5x PE multiple ($2.90 EPS estimate for 2018) which is still meaningfully lower than any of the current P/E levels of the above-mentioned “comparison” companies. One of the major reasons why CWH sports a low PE, besides the cyclicality of its business, is because of the high level of debt it carries on its balance sheet. At over $2 billion in total debt, Camping World currently has a net debt to EBITDA ratio of 4.2x. However, it is important to remember that almost $1 billion of that debt is from floor plan leasing that is tied directly to RV inventory. Removing the floor plan leasing debt brings the net debt to EBITDA ratio down to a comforting 2.1x. If there were a downturn in the market, Camping World’s debt level would decline as it would reduce inventory and order less from manufacturers.
The risks facing Camping World today are the same risks the industry continually faces: Rising interest rates, rising gas prices, and a slowdown in the economy. Anyone of those risks will have a negative impact on the company’s earnings, but the trifecta (having all risks hit at the same time) will have a significant negative impact on the industry, the company, and its profitability. Camping World is not only better suited than its peers to survive the trifecta of risks but will benefit from them in the long-run by allowing the company to acquire established dealerships at a significant discount to current market multiples.
Since the financial crisis, RV shipments have been steadily rising. Camping World has chosen to focus more on the towable segment of the RV industry as it comes at a cheaper price point and is attracting a younger buyer which will bring in additional future sales (trade-in and cross-selling). One of Camping World’s hidden assets is its database of potential, active, and Good Sam members. Being able to harness this data allows the company to create direct marketing campaigns, cross-sell products and services, and determine new locations for its retail/dealerships. Building its Good Sam membership is a major reason why the company has expanded its acquisitions to include outdoor sporting goods retailers and brands.
Currently, shares of CWH are trading around an 8.5x PE multiple, which reflects the markets’ concern about the cyclicality of its business and the high net debt to EBITDA levels (when including floor plan leasing). I believe that a 12x PE multiple is more commensurate with its dealership/retail footprint, its ability to harness its ecosystem and strong relationships with RV manufacturers, and its growing and recurring revenue from Good Sam. At 12x an EPS estimate of $2.90 (2018) yields a stock price around $35 or ~42% higher than today’s price. I would expect that over time Camping World’s EPS will reflect the company’s expanding locations, brands, and Good Sam membership.
I am not discounting the possibility of a downturn in the economy or further increases in gas prices and interest rates, but I would see that as a long-term opportunity for both Camping World and its investors assuming the balance sheet and earnings remains relatively healthy.
The market's better understanding of the company's debt level while recognizing Camping World's ability to leverage its growing dealership/retail footprint, and growing connection of potential, active and Good Sam members.
|Entry||06/20/2018 02:04 PM|
That is a good question. Most investors have been expecting a meaningful fall off in RV sales or at least slow down/decline. The real question besides will it be a slowdown or a meaningful decline is when will it happen. Based on THOR and WGO earnings call, it does not appear to be taking place as we head into the summer season. As I mentioned in the write-up, CWH is not immune to a fall-off in sales, but the longer the decline takes the greater the dealerships/stores, legacy customers, and Good Sam members it should have, which could soften the impact.
I talked about EPS of $2.90 for 2018. I backed into this number by a conservative "back of the envelope" valuation. I averaged the number of expected stores for the year and then factored in the number of new and used RV sold per store, the ASP for each, the F&I that goes along with those sales and the parts and services expected across the store count. I grew Good Sam membership to 1.9m as we exit 2018. I adjusted profit margins to be equal to or lower than the previous years and was able to back into $2.90/share (a bit conservative) for 2018. If you start to see declining sales in the second half of the year than my expectations will obviously be lower.
As for the "bottom" of the cycle - I have not tried to value the company that way mostly because I do not have a clear idea of when it will come and what that means for units sold. I feel more comfortable putting in lower new and used RV unit sales and seeing the impact on revenues and profits and then determining what that translates into earnings. The longer it takes to get to that "meaningful" decline the better off Camping World's earnings will be.
|Subject||Re: FloorPlan Debt|
|Entry||07/03/2018 04:15 AM|
Floorplan leasing is debt. However, unlike Camping World’s corporate debt, floorplan leasing comes at a much lower interest rate and is easily discharged by liquidating inventory. When Stephen Adams, CWH’s founder and majority owner at the time, received the $20mn, 12% loan from Thor Industries, Camping World was in its fourth straight year of declining sales and in the middle of the financial crisis where credit, including floorplan leasing, was very tight. Thor’s loan provided CWH with much needed short-term liquidity and in return, CWH agreed to purchase more RV inventory from Thor. In November 2008, Thor re-launched Thor Credit to provide retail financing for RV customers buying Thor’s RV, another way to keep its inventory moving. It’s obvious that Thor felt obligated to loan CWH the money to keep its largest dealer out of a potential bankruptcy and disrupting Thor's production. However, I think it was less about paying down CWH’s floorplan obligations and more about keeping its manufacturing moving. Lemonis commented at the Stephens Conference in June of 2017, that Thor’s financial support during the 2008/2009 downturn with a bridge loan helped cement the strong relationship both companies share today.
I look at floorplan leasing for any RV dealer as a cost of goods sold regardless of whether it comes from the OEM or a financial institution. Without floorplan leasing, RV dealers (or any auto dealer) would not be able to maintain a meaningful inventory. If Camping World did not receive Thor’s financial assistance and did fall into bankruptcy, its floorplan leasing debt would quickly and easily have been discharged by liquidating its inventory. The same would not be true of its corporate debt. You would not be wrong to combine floorplan leasing with Camping World’s total debt but doing so makes the company’s balance sheet appear to be less robust than I truly believe it is.
|Subject||Re: Stock Performance & Mid-Cycle Earnings|
|Entry||07/06/2018 11:40 AM|
There are several factors that I believe have contributed to the sell-off in the stock price: Expected economic factors (potential downturn in the economy, rising interest rates and gas prices), purchase of Gander Mountain seen as a pivot to outdoor apparel and accessories, the recent increase in inventory, and sudden change of auditors. Many investors believed that the purchase of Gander Mountain was a way for Camping World to diversify away from pure RV sales, and the company did not do anything to dissuade that premise. It was not until recently, that Camping World indicated that the purchase was a “back door” entry into the 5-6 states it wanted to be in where it could use Gander’s established footprint to sell RVs. The increase in inventory reflects the re-opening of those store and the need to stock them. As for the sudden change in auditors, the company has indicated that it was purely driven by the cost of service and so far, there has been no indication to the contrary.
As I have mentioned before, Camping World revenues and profitability will not be immune to a downturn in the economy, rising interest rates or gas prices. However, the company is less levered to those economic factors then they were in 2008/2009. Because they have purposely changed their inventory to carry more towables than motorhomes, CWH has driven down the cost of their inventory (floorplan leasing), and the ASP/unit (↓~5%/year for the past 7 years). I do not think the company is over-earning as there is no indication that future sales have not been brought forward in the fears of higher interest rates (financing terms). If anything, customers might be waiting for a downturn in the economy to purchase an RVs at more “distressed” levels. There has not been any decline in RVs shipments. Year to date (through May), total RV shipments are 10% ahead of where they were in 2017. Of course, all that can change rather quickly if the economy heads south.
|Subject||Re: Capital Allocation/SI|
|Entry||08/30/2018 02:14 PM|
Recently, Camping World’s earnings have been reinvested back into the company to cover inventory and opening expenses as it rolls out its new Gander Outdoor/Camping World footprint.
I think that short interest in the stock is driven by two issues: The economy and CWH’s poor job of communicating its vision for the Gander Mountain acquisition. Since 2011, RV shipments have been on a steady rise as the industry has benefited from historic low interest and low gas prices. As interest rates rise the fear is that the economy is going to slow down or turn, which is also supported by lower year-over-year RV shipments in both May and June of 2018. In early June, when Camping World gave a more detailed explanation of their vision for Gander Mountain – reopening some of their stores to now include RV sales – the market rallied and in part helped by short covering. However, I have heard, anecdotally, that a good number of the shorts reestablished at higher levels. I think the shorts that are in are waiting to see if CWH can execute on their Gander plan as well as see what happens, economically, to the RV industry as a whole.