The Complexity Caper That Is Camping World Holdings (CWH)

75% Upside

The RV sector generally trades at cheap prices relative to earnings. Looking at a small basket of manufacturers and retailers would reveal EV/EBITDA multiples somewhere around 5x. Moreover, the industry as a whole has seen solid growth post-pandemic, as more and more vacations shift from hotels in the big city to tents at the campground. From an investment perspective, the trends look good.

Deep diving into Camping World Holdings, Inc. (NYSE:CWH), you will find a rather complex shareholder structure that both favors founding insiders and deters outside investors. It is difficult enough reading through the legal jargon of a Tax Receivable Agreement that pays out earnings to private unit holders of the business. But once you get past the Umbrella-C design of Camping World Holdings, you will find ownership – with CEO Marcus Lemonis – that is set on paying dividends, buying back shares in the open market, and holding tight to a business that will grow at 15% per year. If CWH trades anywhere near the EBITDA multiple it did three years ago, it’d be worth nearly $60 per share. I for one am willing to go along for the ride.

What a Ride it has been, so far…

Back in early 2018 Camping World was trading at 9.5x EV/EBITDA. At the time, the company was in the midst of acquiring Gander Mountain & Overton via bankruptcy auction, and was able to acquire all of its inventory at cost, as well as add 74 stores in just a few short months. It was a way to buy cheap assets and increase the store count by over 50%. Prior to the acquisition, Camping World generated $4.3 billion in sales, grew revenues at a 21% clip, and drew $233 million in profits (up 16% year over year). The business was growing, and everything was great. CWH shares traded at $33 per share.

Yet things weren’t so rosy, as the Gander acquisition turned out to be full of thorns. The very nature of acquiring distressed assets means, well, you’re buying distressed assets. The problems were innate and in order to fix them, operating expenses went through the roof. The company’s “net income attributable to Camping World Holdings, Inc.” dropped from $189 million down to a $60 million loss (from 2016 and 2019, respectively). Those figures, combined with rising interest rates circa 2018 and the market’s “taper tantrum”, would ultimately send CWH prices under $8.00 by the end of 2019. An investment in early 2018 would have lost 75% of its principle.

When 2020 and the pandemic reared its ugly face, CWH fell to sub-$5 per share. But it wasn’t all gloom. The long-term thesis management beat the drum on – the only nationwide network of RVs gaining steam on a path to $1 billion in annual EBITDA with a growing (and younger) customer base – was still intact. By the end of 2020, it was booming. Camping & the great outdoors became the COVID vacation, and as a result, CWH vaulted from $5/share up to $40/share in 18 months. So here we are in 2022, and through the roses and thorns, the business is going to generate $7 billion in revenues and over $900 million in EBITDA. The current price implies CWH is trading at 4.7x EV/EBITDA.

Camping World Good Sam and the Up-C Structure

It’s too easy for me to say “buy CWH and make 100% returns”. I did that in the past, and proceeded to lose over 75% of my investment. Moreover, it’s been done already. Many of the recent articles I see tout headlines like “Upside potential of about 100%”, “my bold $80 price target is completely feasible”, or “Camping World offers nearly 100% upside”. All are valid opinions, and I appreciate the work. But what has happened recently? CWH shares have dropped 20% in a month. Go figure. Why do shares trade so cheaply? Why is it different from peers like Lazydays Holdings (LAZY) or industry OEMs like Thor Industries (THO) & Winnebago (WGO)?

If, like me, you took a gander (pun intended) at the annual reports, you might find extraordinary differences in diluted share counts across years, jumping from 27 million to 89 million in 2018, and then 46 million as of the most recent quarter. These varying share counts are the result of Camping World’s corporate structure as an umbrella-C corporation. Actually, Camping World Holdings is the managing member of Camping World Good Sam LLC, which represents the underlying RV business. As a result of the operating agreement of CWGS, CWH – the publicly traded shares – owns approximately 47.4% of the business. Note that this figure changes depending on how many units of CWGS LLC Camping World Holdings owns; more on that later.

For now, notice that over 50% of the profits go to the other LLC unit holders, plus additional consideration in accordance with the Tax Receivable Agreement. The “non-controlling interests” line item draws much of the earnings, as it was designed by the founding unit holders (or “continuing equity holders”) of CWGS. The structure favors the unit holders (of which CWH is an owner) while at the same time reducing tax liability. That in itself is a good thing.

What is an Up-C structure? It is a specific construction of an LLC when a business (Camping World Good Sam) goes public via IPO. Typically, the publicly traded entity is organized as a holding company with corporate status, and enters into agreements with the founding partners, namely a tax receivable agreement and an exchange agreement (both are important for our discussion). The LLC units are divided among the holding company and founding partners. Shares of the holding company are then sold to the public via IPO, and because the underlying business maintains its LLC structure, the partners receive the tax treatment of a flow through entity.

The partnership treatment means that CWH is not responsible for taxes on the entire business, only the portion that it owns. In exchange for such status, the continuing equity owners – namely CEO Marcus Lemonis and Crestview Partners II – arrange a “TRA” (tax receivable agreement) in which 85% of any tax benefits realized by CWH are to be paid to the continuing equity owners. Similarly, Mr. Lemonis and Crestview were issued Class B stock exchangeable to Class A on a 1:1 basis. The upshot is that the majority of the profits from CWGS go to the continuing equity owners, and CWH also holds tax liabilities that will be paid to those partners down the road. While the situation is complex, the structure does indeed benefit all parties involved, albeit favoring the Class B holders. Fortuitously, Marcus Lemonis owns 80% of the Class B stock.

Behind the Structure, Dividends, Buybacks, and Insider Ownership

The consequences of the Up-C structure are multi-faceted. For one, average retail investors might look at the P/E ratio and think, “this stock is going to triple!”, without realizing half of the net income goes out the back door. Moreover, a glance at the 10-K reveals unusual changes in diluted share count from year to year. This type of complexity makes CWH hard to understand, and perhaps unworthy of investment. Consider the table below, which outlines the Class A shares, Class B Shares, Diluted Share Count, Net Income, Net Income attributable to non-controlling interest (“NCI”), and Net income attributable to CWH since 2018 (note the 2021 Q3 column represents the first nine months of 2021):

The data is telling. 2019 turned out to be a difficult year; the Gander acquisition ballooned the expenses and new RV sales were on the decline. In addition, net income attributable to non-controlling interest is enormous, representing 56.9%, 64.5%, 49.7%, and 84.4% of Net Income, respectively. Looking at these numbers, would you want to invest in CWH?

While the TRA and Up-C structure remain favorable to Mr. Lemonis and Crestview, it helps to view CWH on an EBITDA basis – a rare feat for some value investors – as it takes into account earnings before taxes. A deep dive into the annual report (pg. 72) reveals many gross adjustments on items like goodwill, restructuring, and equity-based compensation, among others. All of these items present tax liabilities that are hard to predict in the future, making the total payments out of CWH to the founding partners uncertain. Moreover, any step up in tax basis from share conversion triggers TRA payments to the class B holders. That does provide a benefit to Class A holders, but we don’t know when (if at all) any conversions will occur (Crestview converted some of its stake last year). Not to mention we haven’t even touched on the floor plan debt CWH uses to fund its inventory. All of these factors are unknowns and admittedly, I don’t aim to provide a perfect assessment of the structure. What I am saying is that EV/EBITDA can bypass some of the Up-C uncertainty and rectify different valuations due to the sophisticated accounting.

The one great salve for public holders is that the CEO owns 47.1% of the shares, most of which are Class B. Interestingly, Mr. Lemonis does not take a salary, which aligns his interests directly with that of shareholders. His compensation is essentially dividend payments. That said, the dividend policy – currently paying out $2.00/share annually – is likely to remain in place. Furthermore, Camping World has paid many “special dividends” in the past, which represent excess tax payments related to the TRA. The same logic applies to the share repurchase program, recently increased to $200 million. These actions benefit CWH shareholders as well as the founding partners, and won’t be going away any time soon. They are a strong defense against any downside in CWH prices.

Cyclical Caveats

The recent market downturn harkens back to the 2018 “taper tantrum” and rising interest rates that sent CWH prices down 60%+. As a cyclical business, the macro investors out there still see rising interest rates as a negative to the RV space. CWH shares fall into that spiral. Even if management is buying back shares hand over fist, CWH prices could stay perpetually cheap. Is that necessarily a bad thing?

It’s worth noting that 2021 RV shipments exceeded 600,000 (the most ever), and RVIA is forecasting over 613,000 units for 2022. Despite the impeding interest rate increases, the RV industry seems poised to continue growth.

Recall the turmoil Camping World experienced back in 2019, in which new RV shipments decreased and the business was dealing with restructuring. The income for CWH was negative that year. But I would argue in earnest that those conditions don’t exist anymore. The Gander assets have been repurposed, and Camping World has diversified its dependence away from new RV sales. Specifically, this year 23% of the sales will come from used RVs. In 2018, that number was 15%. The Good Sam subscription, finance, insurance, and services segments also add different revenue streams to the pool. The company risk is not as high as the market risk, which in theory will serve CWH holders well over the next three years. As the most expansive RV network in the U.S., CWH is in good position to weather any market challenges.

Conclusion

Camping World is a different company than it was three years ago, but shares trade at the same price. While the corporate structure muddies the waters and favors founding partners, the dividends, buybacks, and insider ownership make it worth wading into. Even though the tax receivable agreement and class B shares divert over 50% of the income to non-controlling interests, it helps that those non-controlling interests are owned by a CEO who doesn’t take a salary. By looking at the enterprise value and earnings before taxes, we can view CWH through a different lens that the market may not appreciate. Even if share prices don’t improve over the long term, the dividends and buybacks will shield any downside. If CWH does move up, 7.5x EBITDA seems like a fair price, implying roughly $60 per share.