Being greedy when others are fearful is easy to say, but hard to do in real life. That’s because it takes a lot of strength and conviction to invest when others are running out the door. But this also leads to Potential for long-term returns that outperform the market. That brings me to Camping World (NYSE:CWH), which is now a long way off its 52-week highs, and in this article I’m highlighting what makes the stock a potential buy, so let’s get started.
Camping World is the largest retailer of RV and related products and services in the United States. The company has a stock market cap of $2.0 billion, which is low for a company with such a large footprint (12% of the U.S. RV market). The company also owns and operates Good Sam, the world’s largest RV club with over 2 million members.
CWH is benefiting from favorable demographics in the United States, where the baby boomer population is aging and increasing numbers are taking up camping and RV driving as a recreational activity. The company has also invested in its store base as well as its online presence. It now has over 185 locations in 42 states and is expanding its online offering.
Contrasting with its year-to-date stock price performance (down 38%), the company appears to be holding up well, with record first-quarter revenue of $1.7 billion, up 6.7% year over year. Additionally, CWH didn’t have to sacrifice pricing to deliver growth, as its gross margin improved 23 basis points year over year to 33.7%.
The company has also expanded its financing business, which helps customers finance their RV purchases. The financing business has grown at a compound annual rate of 20% over the past 5 years and now accounts for 20% of CWH’s total revenues. Notably, Adjusted EBITDA declined $7 million year over year to $182 million. However, this was due to a rebalancing of inventories in distribution centers as well as larger floor plans and new store openings.
In the meantime, the company appears poised to return capital to shareholders, having repurchased 2.6 million shares on the open market, resulting in an impressive 5.4% reduction in share count to 41.7 million shares sequentially QoQ base has contributed. Additionally, CWH recently increased its dividend by 17% and is a high-yielding stock with a 9.9% yield. Additionally, the dividend is protected by a payout ratio of 21%.
Looking to the future, CWH is a growth company as it looks to continue expanding through acquisitions. These include the recent acquisition of Anthem RV in Arizona, a SuperCenter that offers new and used RVs from top manufacturers, RV accessories and the full portfolio of Good Sam products and services. This location will also complement CWH’s existing Arizona locations in Avondale, Mesa and Tucson.
Risks for CWH include its somewhat leveraged balance sheet due to acquisitions and the growing nature of the company as it comes with a net debt to EBITDA ratio of 3.8x. In addition, there are macroeconomic inflationary pressures as RVs are a big ticket buy for consumers. This is reflected in the fact that RV sales fell 31% year over year in April. However, CWH benefits from a huge installed base for parts and services, as CEO Marcus Lemonis noted during the recent conference call:
When we look at the macro factors affecting new RV sales, it’s easy to see the pressures, consumer confidence, inflation, rising interest rates, etc., but for us it’s more complex.
If you take a closer look at our business, it’s true that selling new motorhomes makes up a large part of our company’s revenue. However, it is also important to remember the other key areas that serve the installed base of RV drivers.
Based on retail data for the past few years, we believe the installed base of RVs has grown by over 1 million in the last few years. The installed base feeds our high-margin service, collision and parts businesses, our recurring, steady and predictable Good Sam business, which grew 9% quarter-on-quarter, and our used RV business, which grew over 35% in 2017 revenue .
As a management team, it is our job to anticipate change and align our business accordingly. The common discussion we have is what our business would be like if new RV sales were to decline at various levels. We sensitize the model. If you assume that revenue is the only factor driving variability in our business results, then this is often the guide I use.
I see value in CWH at the current price of $25.30 with a forward PE of just 4.8x. While sell-side analysts expect earnings to fall over the next few quarters, there is potential for revisions as CWH has beaten top and bottom line estimates for the past 7 of 8 quarters.
With short interest accounting for 34.7% of free float, earnings surprises could result in a short squeeze. Sell-side analysts have a consensus Buy rating on the stock, with an average target price of $35.44. That equates to a potential one-year return of 40% based on share price appreciation alone.
Camping World is a dividend stock with a 9.9% yield that focuses on returning capital to shareholders through buybacks and increased dividends. The company has a strong history of earnings growth, which could result in a short squeeze as 34.7% of the float is short. It now has a large installed base in need of parts and services, which could help cushion the effects of an industry downturn. For the above reasons, I see CWH as a speculative buy for a well-diversified portfolio.