Description

Overview:

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.

Industry:

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.

Company:

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.

Valuation:

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.

Risks:

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.

Conclusion:

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.

Catalyst

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.