Camping World: A Recurring Revenue Juggernaut (NYSE:CWH)

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Camping World Holdings (NYSE:CWH) is the leading RV dealer in the United States. The company’s ancillary businesses help support a growing ecosystem of RV consumers. We believe the upside in the name is close to 100% from current market prices because the stock is trading as though it solely sells big-ticket RV motorhomes, despite its multiple touchpoints on the consumer and high margin recurring revenues. The current stock price provides shareholders an attractive entry price and access to a resilient business model and best-in-class management team.

Company Overview

Camping World is America’s largest retailer of recreational vehicles (RVs) and related products and services. As of Dec. 31, 2021, the company operated a national network of 185 RV dealerships and/or service centers. The majority of these are conveniently located off major highways and interstates in key RV markets.

Reason for the Discount

The company is currently trading at a discount for the following reasons: (i) the market believes the company’s earnings are unsustainable and driven primarily by increased demand for outdoor activities during the COVID pandemic, (ii) fears of an imminent recession, (iii) the market’s impression that CWH sells primarily big-ticket RV motorhomes, and (iv) a complicated corporate structure and insider control.

To start, I would like to dispel the reader of the images of large luxury motorhomes. The company’s top two selling vehicle types are towables (travel trailer and fifth wheels). Travel trailers and fifth wheels are sold for an average price of $31,000 and $62,000, respectively, and made up 72.2% and 19.3% of new unit 2021 sales, respectively. Consumers can finance these vehicle purchases for as low as $149 per month (more on vehicle financing below).

Simplified Sum-of-the-Parts Establishes a Case That Implies Minimal Downside Risk

The market’s fears of non-recurring revenue do not give credit to the CWH business model, which emphasizes high margin, recurring revenue and takes advantage of an increasing install base. The company is not simply made up of dealers selling luxury motorhome vehicles. CWH has six operating segments: Good Sam Services and Plans, New Vehicles, Used Vehicles, Products, Service and Other, Finance and Insurance (F&I), and Good Sam Club.

As mentioned on the CWH’s earnings calls, CWH’s crown jewel asset is its Good Sam Services and Plans. Good Sam Services and Plans segment includes services such as extended vehicle service contracts, vehicle roadside assistance, property and casualty insurance, travel protection, travel planning and directories, and consumer shows and publications. These items are purchased to cover a multiple-year period and are renewable in nature, generating high-margin, recurring revenue. Of course, the growth in this area is driven by vehicle purchases (RV demand), but its recurring nature is driven by the installed base of RV owners throughout the United States. The Good Sam business has 70%+ renewal rate.

Over the last five years, this segment has done $160-$180mm in revenue and $75-$88mm in EBITDA. Given the recurring nature of the business and its high margins (mid-40% EBITDA), we believe this segment alone could be worth $1.0 billion.

The company earns commissions on F&I contracts related to the sale of RVs. In these transactions, the company acts as an agent to the F&I contract. CWH’s partners take all underwriting risk in these transactions.

The F&I segment has gross margins of 100%. However, the company lumps F&I within the RV and Outdoor Retail segment – for valuation purposes, we break this segment out. Yes, the F&I business increases with more RV transactions; however, the strength of the business is its recurring nature from contract renewals. Also, given the outsourced nature of the business and the low labor associated with F&I (disclosed on the company’s latest earnings Q&A), we assume minimal SG&A expense and therefore feel comfortable valuing the segment based on a multiple of gross profit (the company does not breakout its segment level income, but gives us gross profit numbers). The LTM gross profit was $598mm, but to be conservative, we use the average of the last 5 years which is $435mm. Assuming a multiple of 8-10x, the F&I segment should be valued at $3.5 billion to $4.4 billion.

The Good Sam Club is a membership organization that offers savings on a variety of products and services. Good Sam Club revenue consists of revenue club membership fees and royalty fees from co-branded credit cards. The Good Sam Club has 2.1mm members (up from 1.8mm members in 2017). Again, another annuity-like business that benefits from an increased install base. At 2-3x revenue, the Good Sam Club is worth $96mm to $144mm.

Based on the current market price of $27.60 as of April 8th, 2022, the total market enterprise value is $4.5 billion. We valued the above three segments at $4.6 billion to $5.5 billion.

We do not include the New Vehicles, Used Vehicles, or Products, Service and Other segments because we generally agree with the overall difficulty in valuing these segments based on the elevated earnings over the last twelve months and the macro environment we find ourselves (decreasing consumer sentiment, increasing gas prices, inflation concerns, etc.). However, to further emphasis our risk-aversion, we’d like to show how the company’s capital structure actually limits the downside risk to these segments.

The company’s total enterprise value is calculated as follows: $27.60 per share, on 86.2mm shares, a market cap of $2.3 billion. The company has net debt of $2.2 billion, implying a total enterprise value of $4.5 billion. But looking more closely at the debt, the debt consists of $1.4 billion in long-term debt (senior secured credit facilities) and $1.0 billion in the company floor plan facility. The floor plan facility is specifically used to finance the company’s inventory which consists of New RVs ($1.1bn), Used RVs ($406mm), and Products, Parts, Accessories and Other ($278mm). This is not debt that was raised at the corporate level for a dividend recap or to purchase long-term assets; it is used to facilitate trading in its inventory – inventory that has turns of 2-5x per year.

As of Dec. 31, 2021, the company had an inventory balance of $1.8 billion. So, if we are conservative and assign zero value to the above segments (New RVs, Used RVs, and Products & Service), the debt at the very least would be removed (paid down) from the inventory. The new implied enterprise value based on the market prices would be $3.5 billion (removing the $1 billion in debt). Given the above value assumptions on the other businesses, marking the New, Used, and Products & Services businesses to zero along with its floor plan debt facility, and using a going concern multiple of 5-7x on the company’s $10mm in corporate expenses, the implied share price would be $38.51-$39.37 (implying 40% to 43% of upside).

What if the industry doesn’t get cut in half in a post-COVID world?

Although we do not believe the RV market will stay as hot as it was in 2021, we do believe the market is pricing in an unfounded dramatic decline in the industry.

We believe this for two primary reasons. One, the Street doesn’t seem to be giving credit for the benefits that come with the increased interest and in turn the increase in total addressable market (TAM)/market participants that resulted from the “COVID RV craze.” The dramatic increase in awareness which may have been driven by COVID has created a TAM that is far greater than it has ever been.

Two, the outdoor movement, which may have accelerated due to COVID and its impact on alternative travel/entertainment options, has certain aspects that are sticky in nature – those who purchased RVs and camped over COVID didn’t do these activities on a whim. These aren’t activities that are as seamless as an impromptu cruise or a hotel in Europe. The planning that goes into an RV trip has certain barriers or intimidation to the uninitiated. Therefore, we believe the shift that took place isn’t merely a fad and the install base is not as fickle as the market is currently assuming.

During the Winnebago Industries, Inc. (WGO) Q2 2022 earnings call in March 2022, the company said the following:

Contrary to some theory speculating on possibly low retention of 2020 and 2021 first-time buyers, new purchasers are most likely to keep and use their current RV into 2022 and beyond. With 50% already seeking an upgrade via new parts or a different RV altogether. 6 in 10 new millennial RVs, those who bought an RV for the first time in 2020 and 2021, already say they are likely to purchase another RV in the future. As it relates to the growing popularity of flexible work, amongst new RVers 25% of millennials and 27% of Gen Xers stated that they used an RV for a place to stay while working as a reason for purchasing the RV.

The Thor Industries, Inc. (THO) earnings call echoed this same sentiment: “We remain very optimistic about the growth of RV industry for 2022 and in the long term.” Both companies are prominent suppliers in the RV supply chain and both continue to believe that consumer interest is at an all-time high despite current sentiment.

Our research through industry publications also describes a camping environment that continues to show enthusiasm. According to the KOA Monthly Research Report in March 2022, “nearly two-thirds (64%) of campers expect to take a camping trip this year. With 50% of campers indicating they have already booked some of their trips and building on a robust 2021, the outlook for 2022 camping is strong.”

Like other investors, we are concerned by the alarming headlines surrounding the current macroeconomic environment. However, we believe these fears are already baked into the market price and may be overblown.

The concerns do not give credit to the favorable trends in camping and the outdoor lifestyle. The growing interest in camping and experiencing the outdoors, investments in campgrounds, continued remote work, increased federal funding of national parks and favorable demographics of younger buyers support a healthy foundation for the RV market to continue to build on.

Despite the declining consumer confidence data, rising gas prices, and rising interest rates, RV orders have continued to be replenished at a rate much stronger than pre-COVID levels. According to THO CEO Robert Martin, “most every RV produced by THOR and its competitors sells quickly.” Additionally, market concerns over how gas prices will impact the RV market do not take into consideration the expenses incurred for alternative travel options such as airfare and cruise tickets and also the fact that most campers stay within 100 miles of home during their RV trips.

Catalysts

The company’s earnings, expected at the beginning of May, should give a good window into the RV landscape. It is our belief (although not baked into our valuation) that those that started buying RVs will continue the RV and camping lifestyle. Although the dramatic growth in 2021 might not be sustainable, the installed base is not one that is going to go away fast.

The company currently has a $200mm buyback program. In the month of December 2021, the company bought back $69mm shares at an average price of $39.02. If prices stay below that avg. price, I would not be surprised if, in the next three to six months, this $200mm buyback is completed and an additional share repurchase program is announced.

The company pays $0.625 in quarterly dividends ($2.50 annual) to its Class A shareholders (CWH shareholders). I would not be surprised if this increases as the company CEO, Marcus Lemonis, has stated his willingness to do so given the high short interest in the stock.

Conclusion

We believe the best way to look at the company is looking at first at its high margin recurring businesses (Good Sam Services and Plans, F&I, and Good Sam Club). The company’s ability to emphasize these aspects of its business reduces the cyclical risks of an RV business.

The market is currently pricing the business as if the company’s EBITDA is going to get cut in half from $847mm to ~$420mm. We do not believe this thesis is correct and take joy in getting paid almost 10% (in dividends) to wait. If the market is right, investors face limited downside given how cheap the name is today. If the market is wrong and the RV industry remains strong, the buyback will continue to be pursued aggressively (especially at these price levels), the dividends might increase, and the almost 40% short interest in the stock will inevitably cause the stock to soar.

Our price target is $55, implying 99% upside to the current market price.