Camping World Holdings, Inc. (NYSE:CWH) is one of the largest RV retailers in the US at a market cap of $2.15 billion, mainly growing through acquisitions, reaching nearly 190 dealerships to date. The RV industry saw record-high sales due to the COVID-19 pandemic, characterised by low-interest rates, an increase in local tourism activity and remote work possibilities. The RV industry is cyclical, and the economic slowdown has ended the boom. Investors are less convinced by CWH as we see the stock price drop by 32.07% over the last year and an uncomfortably high short interest of 25.33%.
2022 is a less favourable environment to sell costly consumer discretionary goods with record high-interest while inflation raises daily living costs. However, CWH has a resilient and diverse business model, including recurring revenue by providing third-party services with high margins and zero cost.
Although the company has increased its debt intake through its aggressive acquisition strategy, and RV shipments are expected to drop by 21% next year. It remains an attractive long-term dividend stock investment due to its rigid business model, while management takes a conservative stance on waste through cash control and limiting SG&A and CapEx spending. Historically, the company has improved its processes and grown its market share through opportunistic acquisitions during more challenging times. For this reason, investors may want to hold onto this stock, which can historically handle headwinds better than its smaller fragmented peers.
CWH, founded in 1966, is a retail company that sells RVs and related products and related services in 190 retail locations across 42 states in the US. Its growth has been through M&As rather than organically, acquiring 41 companies, 24 in the last five years. In May 2022, it made its largest acquisition of Richardson’s RV centres in California. Acquisitions are typically opportunistic and bought at a bargain price, benefiting from the cyclical nature of the industry and the inability of smaller dealerships to perform throughout weaker seasons. The company has accumulated a total debt of $3.22 billion due to this aggressive growth strategy.
Besides its impressive footprint across the USA, one of the critical reasons that CWH has a strong and resilient business model is that it has six different business segments generating revenue. To weather the predicted downturn in new RV sales, CWH will focus on three of these business segments, namely its used business, which brings in a high margin and in which the company has a competitive advantage due to its strategic data collection and position in the marketplace. Secondly, the services business benefits from the fact that there are already more than 11.5 million RVs in the market that could be serviced for maintenance, improvements and renovations. Lastly, its Good Sam business provides everything from RV rentals to vehicle insurance and travel assistance. Services generate revenue through fees from third-party companies at a minimal cost to CWH.
When things start to go bad, we are quick to jump into worse case scenarios. However, if we look at the long history of RV shipments we can see a clear cyclical nature of the industry, and as an expensive discretionary item it ebbs and flows with the economic downturns.
Studies show that the global RV market is expected to grow at a CAGR of 9.5%. Furthermore, we can see an upward trend in North American households with RVs, which is a strong indicator that CWH will continue to generate income from its services businesses. COVID-19 has increased the TAM by introducing the lifestyle to a glowingly younger population.
Finance and Valuation
If we look at the revenue, we can see an upward trend; however, it is essential to note that this is through acquisitions rather than organic growth. Alongside revenue, gross profit has increased, and the margin has grown from 28.44% in 2018 to 35.75% in 2021. One of the key factors for this margin increase has been the additional services and financing options that CWH offers to its customers via third-party companies. It makes a generous fee with few costs involved.
While there has been a significant decrease in the sale of new RVs, CWH’s used RV sales have compensated and thus continue to sell high numbers. Its strength lies in the diversified revenue streams, with a special focus on used cars and services.
CWH has a high dividend yield of 9.85%. We can see that although the dividend has sometimes been lower, they have historically been consistent in their payouts. Its last payment was on 29 December 2022 at $0.63 per share.
Although the management team has emphasised maintaining the dividend yield, we can see that the company historically has a negative cash flow in Q4s and Q1s due to the seasonality of sales, which means its cash flow could fail to cover its dividend.
If we look at the company’s capital structure, we can see that its enterprise value of $4.27 billion is made up of a significant amount of debt at $3.22 billion and a small amount of cash at $148.24 million. Its current ratio is at 1.42, and its quick ratio is at a low 0.22, which is not a good liquidity position if the company needs to pay off near-term debts.
The Balance sheet shows that much of the company’s financing is through debt. Although the debt is still relatively cheap, with a post-tax cost of debt at 2.63%.
If we take Seeking Alpha’s Quant rating, the company scores well on valuation and growth with an A+ and A. However, its profitability is C+, and the net income margin is very low at 2.79%. It has a desirable price-to-earnings ratio of 5.57 compared to the sector median of 9.06.
We have seen above that CWH has a high intake of debt due to its high-paced acquisitions and simultaneously not much cash going into the next two historically weaker-performing quarters. For this reason, we should be cautious as to whether the company has sufficient cash to pay for future dividends amongst other factors. Furthermore, the RV industry has faced and will continue to face strong headwinds as an economic recession looms. Furthermore, the industry is impacted by seasonality. We are about to enter two of its historically weaker quarters, followed by more robust demand during the second and third quarter summer months. Although we should remain cautious of this, one of the strengths of CWH’s business model is that it has diverse income streams less sensitive to the cyclical nature of the business. Another factor to be aware of is that there have been many insider sales over the last three months, totalling $10.1 million worth of shares. There may be various reasons for the sales, but it is always more of a positive note to see insiders buying into their business.
The COVID-19 boom for the RV industry has reached its peak, and the forecast for RV sales is expected to decline steeply. This will and has already harmed the number of new RVs sold at CWH. However, its robust business model relies on diverse revenue streams, which have compensated for the losses and will continue to be the focus while there is a cyclical downward buying trend along with a slowing economy. The company is cutting down on costs, streamlining processes and potentially new acquisitions in the pipeline. CWH will benefit from the existing 11.5 million RVs present in the marketplace through its used business, service business and Good Sam business. For this reason, I recommend a hold stance and waiting for the healthier performing quarters to show their results.