Camping World Is Not Dead

Summary

• CWH shares have been hammered in 2018.
• The company's results do not support this.
• I think margin pressures are transitory and that shares will move much higher in the coming years.

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Shares have been obliterated this year

Camping World Holdings (NYSE:CWH) has been decimated in 2018. Shares began the year in the mid-$40s but in the 11+ months since, have fallen to just $16 and some change as of this writing. Investors are worried about a variety of issues including the impact of tariffs, the company’s own growth outlook and a general slowdown in the economy. I’ve been bullish on Camping World as it has fallen into the teens after I thought it was very expensive in the $40s, but so far, my bullishness hasn’t been rewarded. However, the stock is priced now as though the company will materially miss earnings projections in the years to come, a condition which has produces a low-risk, high-reward situation for the bulls. As such, I’m still bullish on Camping World.

Revenue continues to move higher

The thing is that while tariffs and a slowdown in the economy are legitimate risks to Camping World in theory, the company’s recent results simply don’t support the bear case. Revenue in the third quarter was up more than 6% as its three reporting segments – which is a new reporting structure from the old structure of two segments – produced revenue gains.

Consumer Services & Plans saw revenue rise 12.7% as the segment added 8.5% to its customer total, which is now up to 3 million. Dealership revenue, which is by far the largest segment, was up fractionally during Q3. Total units sold increased 2.3% as both new and used unit volume rose in excess of 2%. However, consumers selected smaller and cheaper new units in Q3, sending average selling price down by over 4%, which kept a lid on revenue growth. Finally, Retail revenue increased 52.6% thanks to the addition of Gander Outdoors stores, which the company has been adding throughout the year. However, comparable sales in the Retail segment fell off a cliff in Q3, ceding 10.1% and spooking investors. I won’t try to sugar coat the comparable sales result because it is ugly. However, I’ll remind investors that the Retail segment is ~14% of total sales, so the decline isn’t quite as dire as it may seem on a headline basis.

Margins are lower, but not forever

Gross margin dollars rose 5.9% in Q3, roughly congruent with its revenue increase as gross margins were flat at 28.7% of revenue. Consumer Services & Plans continues to punch above its weight as gross profit increased 17.1%, and gross margins added 219bps to 58.7% of revenue. This has been and continues to be the primary growth area for Camping World and it certainly did not disappoint in Q3. Dealership gross profit decreased 1.5% in Q3 as gross margins fell 59bps to 25.8% thanks in part to the lower average selling price of new units. Margins are critical in this segment given that it makes up the bulk of revenue and margins, but Q3 wasn’t exactly ideal. The company did well to continue to attach finance and insurance revenue to its new units, but the decline in new vehicle margins was too much to overcome. Finally, Retail gross profit came in at 36.8% of revenue, a decrease of 209bps. This led to an increase in gross profit of 44.4% against a revenue increase of 52.6% year-over-year for the segment.

The margin numbers for Q3 look pretty rough and they are, but I believe the cause is transitory and that management is working through the situation prudently. For instance, new vehicle inventory per dealership decreased year-over-year by 12.2%, meaning the company is in a much leaner position than it was twelve months ago with inventory on hand. That should mean fewer markdowns and more cash on hand to buy opportunistically.

In addition, the company has taken on more than $250 million of retail inventory thanks to Gander stores and it is working through that inventory to free up cash. Q3’s margin numbers reflected this and while I don’t expect margins to be fixed overnight, in the next couple of quarters, we should see improvement. Camping World needs to work through the inventory it doesn’t want with Gander and that will take a toll on pricing and therefore, gross margins. But once that process is complete, Camping World will be free to use that cash that is currently tied up to buy what it wants for Gander stores and thus, reflate its margin profile back to pre-Gander levels. In other words, margin weakness should be temporary.

Gander is a large acquisition for Camping World and thus, SG&A costs are also inflated temporarily. This is true of any acquisition for any company in any industry, so Camping World certainly isn’t in a unique situation. Indeed, SG&A costs rose to 21.2% of revenue in Q3 against 19.1% in the year-ago period thanks to exactly that factor. That 210bps of operating margin that was lost due to higher SG&A, like gross margins, should work its way back in over time. Mergers are expensive to integrate, and Camping World is firmly in the throes of that now. However, it won’t always be and this is another tailwind to margins that I see going forward as Camping World removes the current redundancies between Gander and Camping World.

An irreconcilable valuation

Analysts have the company earning $2.30 this year and $2.65 next year, putting the stock’s PE ratios at 7.3 and 6.4, respectively. Those are ludicrous PE ratios and the only explanation is that investors fear much lower actual earnings when they are reported. Q3 gave us a glimpse into some of the weakness the company may experience this year thanks to the margin woes mentioned above, but even if we assume Camping World will earn just $2 per share next year, it is still trading for only 8.4 times that number. That would represent a reduction from current estimates of 65 cents, or 25% of total earnings, which seems like a lot. I don’t think that will end up being the case given the factors discussed above, but even if we only see $2 next year, eight times earnings is very cheap.

Summing this all up, I think Camping World will continue to grow revenue organically and via acquisitions. I also think the current weakness with margins is temporary and that operating margins will reflate in 2019 and beyond. Lastly, the stock is far too cheap even if one assumes 2019 earnings will widely miss expectations. As a dominant player in a niche of retail, Camping World is poised for long-term success and its shares are simply too cheap thanks to very bearish sentiment. I think this is incorrect for long-term holders, however, and rate the stock a strong buy.

Analyst’s Disclosure: I am/we are long CWH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.