Description

LAZY – 2x PF EBITDA per share, with $8.30/sh PF cash, and a great rollup opportunity

• I don’t believe the RV trend is a “flash in the pan” – there are several reasons to believe RV sales will continue to be strong. 

• LAZY recently pulled its proposed common stock offering. The company was seeking to increase liquidity in the stock, gain research coverage, and potentially clean up the prefs and warrants. The company wisely pivoted away from the deal due to backlash from holders. LAZY likely had institutional investors approaching them seeking to participate in the growth story through an offering – recent liquidity having been too thin for them to participate.

• LAZY is generating $6.4M in EBITDA per month – even as August/September are historically the bottom 1/3rd in terms of seasonality, these numbers are also with lean inventory positioning and fewer selection options. 

• LAZY has $82M in cash and should have $166M+ in Q1 while keeping debt to EBITDA comfortably below 1x. LAZY has very high ROIC options to deploy their pro forma $8.30/share cash balance.

• Multiple catalysts remain, including: eliminating the warrant overhang, continued strong numbers (LAZY announced on 10/12 a continuation of strong demand thus far in October), and the company telling the M&A story (put out a deck, do a non-deal roadshow, get sell-side coverage). Insiders are heavily aligned, plus LAZY management should know getting the right cost of equity is very important to generating significant long-term earnings per share growth. 

• $8.30/share cash in Q1 and literally hundreds of less sophisticated mom and pop dealers to acquire at 3-3.5x EBITDA and 2-2.5x fully integrated EBITDA. 

The RV Industry is set to remain strong (for the following reasons)

• The boomer generation is becoming larger – the group being prime RV buyers – generally speaking, they are also the most at-risk from COVID and will likely continue to favor RVing over other vacations/activities (most of which they just can’t do) in 2021 and potentially 2022. The elderly are also living longer.

• Many couped up families are being forced to vacation outside and are/will be looking to RVs, millennial adoption and #vanlife has been noticeably growing in recent years, giving the category greater exposure and penetration.

• As more people take RV trips they will share on social media, they will tell and likely invite friends to the lifestyle, this will feed continued growth into 2021/22.

• RV rentals are up over 100%+ yoy, data suggests most renters will love (and share) the activity and many eventually look to buy.

• RV vacations are meaningfully cheaper than most other fly and stay vacations, even when factoring in monthly payments. Gas prices and rates are low. Nowadays, RVs are lighter and sleeker, connectivity options are greater – and appeal to the millions that no longer work in the office but work remotely.

• The tailwind for the industry from 9/11 lasted 15 months and led to avg of 20% yoy RV sales growth. 

• RV sales are cyclical, but shipments have grown 4.5% yr since RVIA started keeping data in the early 80s, ASP has also grown 2.5-3% over the long term and over the past couple of decades.

• Per Camping World there are 10M RVs in the US, if we assume they have ~33 year lives and are then phased out and replaced to keep the fleet flat, then 300k shipments need to occur to keep the fleet flat. If we assume the category and penetration grows on average 2.5% per year for the next three years (maybe 3.5% in 2021, 2.5% 2022, and 1.5% in 2023) that would be new shipments of 350k in 2021, 250k in 2022, and 150k in 2023. Adding 300k/yr in replacing the old fleet would mean 650k shipments in 2021, 550k shipments in 2022, and 450k shipments in 2023. For an average of 550k shipments/yr for the next 3 years. Over the last 3 years shipments have been ~460K, so RV shipments would be 20% above the prior 3 years. 3-year total growth of the fleet by 7.5% should lead to next 3-year RV sales averaging 20% higher levels then the previous 3 years. 

• Whenever there has been a downturn in RV shipments (like 2018/2019) there has always been at least three years of upturn in shipments. Last peak to next peak shipment growth is typically 20%+. Given the scarcity of RVs in 2020 many are delaying replacement to 2021 which should buoy dealer sales in 2021.

• Another factor at play is that large dealers ($700M sales and up – of which there are only a handful – CWH and LAZY are at the top) should take share from less sophisticated smaller players which make up ~2/3rd of the industry. Lazydays advantages include: wider selection and floor plan availability, better rates from banks, better marketing muscle (digital marketing), better brand, more often than not better sales training and service – LAZY sells 95% gross margin F&I better than peers, and in current times better relationships/sway with manufacturers to make sure LAZY has RVs on their lots. 

• The US stock market is very near all-time highs, the wealth effect should help RV affordability/confidence/demand. 

• The senate recently passed the Great American Outdoors Act – basically a $9.5B stimulus plan to better our nations parks – making the outdoors great again. 

Lazydays is cheap and well catalyzed 

Cleaning up the capital structure and de-SPACing should be the next catalyst, eliminating/minimizing the overhang should rerate LAZY to a valuation that actually makes sense. The board of directors and the CEO/CFO have significant interest in the equity, one board member alone has an effective interest of over $100M. The CEO/CFO/VP have huge bonus packages tied to stock, most of which vest at higher prices with a ~2.5yr clock on them. Any way you spin it, these guys are incentivized to work their tail off to create a more valuable LAZY inside of 2.5 years – and frankly, the playbook is quite easy. 

The most obvious step is to eliminate a chunk of the 4.6M share warrants, LAZY would only need to use a fraction of its cash balance to buy them in. I assume the company can retire 2.3M of the 4.6M, at an average of ~$7 per warrant. This would cost $16.1M, the remaining 2.3M warrants would convert at $11.50 and raise $26.5M. This would bring the pro forma fully diluted share count to 20M (9.8M common, 6.88M prefs, 2.3M warrants that convert, and 1M management options). 

The market clearly does not appreciate what LAZY is going to look like in 2021. With Q3 ending cash of $82M, and $25M in debt, LAZY should generate $10M in FCF in Q4, $16-18M in Q1, LAZY’s credit facility matures in Q1 and the company should take debt to EBITDA to say .8x-.9x, LAZY would increase debt from $25M to a conservative $55M, thus adding $30M in cash. Minus the $16.1M for the warrants plus the $37M for the warrant and mgnt option conversions. Adding this up LAZY should have ~166M in cash at Q1 end and debt/EBITDA of sub 1x. $166M divided by 20M diluted shares is $8.30/sh in cash, or over half of what the stock trades for today. 

As for run rate EBITDA generation, LAZY is generating $6.4M in EBITDA per month – even as August/September are historically the bottom 1/3rd in terms of seasonality. And as LAZY CEO said on 10/12 “Our growth pipeline continues to be robust. We are evaluating multiple new growth opportunities including both acquisitions and greenfield buildouts" continued Murnane. "In addition, our Phoenix, Elkhart and Nashville dealerships along with our intention to acquire Camp-Land RV should provide strong new growth in 2021."

NTM EBITDA is likely going to be in the $70M range without including any unannounced acquisitions/greenfields. On the PF 20M share count, at the mid-point this is $3.50/share in run rate EBITDA generation, plus back out the $8.30/sh cash and the shares are extremely cheap at 2x per share EBITDA.

Capital Allocation: The rollup opportunity is real 

LAZY has two high ROIC capital allocation options: M&A and buybacks. LAZY will acquire mom & pop dealerships across a highly fragmented industry (for 3-3.5x EBITDA and 2-2.5x fully integrated EBITDA), this is what Camping World CEO Marcus Lemonis did for 20 years and from nothing became worth what some estimate is $900M. Marcus also said the following last month, “Ability to do acquisitions is best we’ve seen in a long time,  fragmented and non-franchised provides a bunch of targets… enough out there we don’t have to overpay… we do deals 1-4x LTM EBITDA  and integrate to improve by 1-1.5x” So if CWH pays 3x they really pay 1.5-2x. LAZY has said similar things, the roll-up opportunity here is real. LAZY is one of only three players actively rolling up the space, and LAZY/CWH are the ones with access to public currency. Hundreds of these mom and pops would love an exit to retire, having spoken with bankers in the space, deals historically and recently fall in to the 3-3.5x trailing EBITDA range for an attractive dealership.

Scenario #1 – 50% buyback & 50% M&A

If shares are at low levels, buybacks should be likely next year. Assuming a $17.50 price, LAZY could use half of its $166M cash (1Q20), or $83M to purchase 4.75M shares, this would bring the share count to 16.25M. With its other $83M cash LAZY could purchase $28M in fully integrated EBITDA (conservatively). If one assumes the NTM EBITDA run rate of ~$70M is too high, and normalized is really a conservative $50M, and adding the acquired EBITDA would equal $78M in normalized run rate EBITDA. This equates to $4.80/sh in EBITDA, given the M&A runway, LAZY’s leading market position, and the low capital requirements for dealers, LAZY should trade at 8x. Dealers typically trade at 7-11x EBITDA. $4.80 x 8 = $38.40/share.

Scenario #2 – Cash balance deployed just for M&A

LAZY could forego buybacks and continue to deploy cash towards rolling up the industry. LAZY could buy $55M in EBITDA over the next 2 years using $166M and buying at 3x fully integrated. Using a conservative $50M run rate for the existing business plus $55M acquired, equals $105M in run rate EBITDA. With 20M shares out this is $5.25/share. For a price target of $42/share.

Pullback in the RV sector

Many RV stocks including Camping World, Thor, and Winnebago have pulled back recently. This is due to people doubting the staying power of the RV trend and supply chain issues. LAZY should be in a far better position to procure supply than the other 70% of the industry, LAZY should have RVs on the lots. Manufacturers will always want to take care of their top customers. LAZY said last week “Current OEM shipments are approximately equal to customer demand and inventory levels remain flat”. Q4 is the seasonally weak Q for the industry, meanwhile manufacturers and increasing capacity and cranking out all the units they can. See what Winnebago said earlier this week below.

WGO earnings call notes (10/21)

• WGO doesn’t see retail demand slowing down anytime soon (overall, these guys sound conservative too – they don’t give guidance). Confident positive yoy retail growth in 2021 vrs 2020.

• Per customer surveys demand is expected to remain strong in FY2021. Ex. First time buyers who have not participated in 2020 are still considering a purchase in 2021.

• 507k shipments in 2021 forecast by RVIA (RVIA members give them data) seems reasonable even with supply chain issues that exist. Would imply ~MSD retail sales growth in 2021 vrs 2020. 

• Supply chain issues are real but would characterize them as mild in Q3 but increasing slightly in Q4. Still headwinds in Q4. This affects motorhome more than towables due to complexity. 

• Doesn’t see full stop production downtime but some parts come in and out of shorty supply. Supply chain issues probably are still around in 1H21 – certain parts may be in short supply at times. “Analyst community seems more worried about it than we are though.”

• Seeing Sept/Oct yoy sales growth at dealers still being similar to Q3. Extremely pleased with what we are seeing with the Q3 to date retail sales – no decel in retail comps/consumer interest.

• Strongly believe we are seeing a pivot in how consumers chose to spend their leisure time. 

Conclusion

LAZY is mispriced even if you believe the bear case that current EBITDA falls off meaningfully. The rollup opportunity here is very real – the industry is 70% less sophisticated mom and pops, there are nearly 2k to choose from. 

In a bull case where the current ~$70M EBITDA is sustainable due to the RV super cycle, plus LAZY acquires $55M in EBITDA, with 20M shares out is $6.25/share in EBITDA, at a 9x multiple (given the roll up opportunity) then LAZY is worth over $56/sh. 

Valuation Scenarios

Base

Bull

Bear

Catalyst

Clean up capital structure, de-SPAC, strong fundamental performance, roll-up.