We have a variant perception on Camping World Holdings, Inc. (NYSE:CWH). We believe the company is misunderstood and severely undervalued.
Most investors look at CWH in at least one of the following ways:
- Very cyclical business selling high priced and highly discretionary RVs.
- COVID beneficiary and this is peak earnings, with comp headwinds coming from the COVID “one time” benefit.
- “Promoter/reality TV/showman” CEO who missed or had to take down his own guidance five times over a ~2-year stretch from 2018-2019.
We view CWH as follows:
CWH has grown per share EBITDA at a nearly 20% CAGR from 2011-2021E, from $108M to 2021E of $670M. CWH CEO Marcus Lemonis cut his teeth in the auto dealership industry, initially starting as a salesman. He saw the opportunity in the growing RV dealership category and worked his way to becoming the CEO of an RV dealership group in 2001. Over the last two decades, Lemonis has grown his group through M&A and organic growth into what is now Camping World. ML RV Group is wholly owned by Lemonis who effectively owns ~40% of Camping World. We believe Lemonis embodies a successful owner operator with “fire in his belly”, he has become a billionaire through growing CWH and has nearly his entire net worth in CWH equity (and has been buying more in the open market).
CWH has ~2.1M loyalty Good Sam club members that feed a lot of highly recurring and high margin revenue. Good Sam is 63-80% gross margin and includes breakdown insurance, roadside assistance, property & casualty insurance, travel protection, and consumer shows. A Good Sam membership allows Camping enthusiasts discounts on campgrounds as well as many other products and services. New vehicles are only 25% of Gross profit (14% GMs and cyclical), with the rest of the makeup being 12% Good Sam, 31% F&I, 22% used, and 19% products and services. CWH skews 85-90% towables which are not as much of a big-ticket discretionary item as the higher ASP motorized that many think of. With financing, towable RVs are very reasonable with new units costing just a few bucks per day.
CWH has averaged adj EBITDA margins of slightly below 8% from 2011-2021, in recent years CWH has focused on growing higher margin (and more recurring) parts of the business such as Good Sam and parts and service. We believe 8.5% average over the cycle EBITDA margins can be achieved. In 2018 and into 2019 the RV industry experienced demand softness and dealer inventories were very high which led to industry wide discounting and severe margin compression.
During this period, Lemonis consistently overpromised and underdelivered, to the tune of missing or having to take down his own guidance five times over a ~2-year stretch. Lemonis made an acquisition of big box outdoor gear retailer Gander Mountain out of bankruptcy, this acquisition was a failure and CWH incurred significant losses. As one can imagine, Lemonis lost nearly all credibility from the street – a lot of which still sticks to this day – although the sell side is slowly seeing the light. The stock fell from a high in late 2017 of $45 down to the teens.
Lemonis certainly earned this criticism. We think this is a big part of why CWH is irrationally priced today, and it obfuscates the significant strength of the FCF per share growth profile. We believe CWH is a compounding machine that would only be stopped by a prolonged extremely weak US economy or a blowout in gasoline prices to ~$5.
We believe this is a very attractive industry structure
CWH has ~20% market share in the RV dealership industry, over 70% of the industry consists of over 2,200 independent mom and pops. CWH is one of the best rollup/GARP stories in the market today. Most dealers sell for between 3-3.5x EBITDA including rent expense, and after CWH integrates them and improves ops, integrates Good Sam, sells 100% GM F&I better, and uses its buying power with suppliers - it can be 1-1.5 turns lower on a pro forma basis.
Why do dealerships sell for such low a multiple? There are only three real consolidators in the industry, CWH, Lazydays, and RV Retailer LLC. There is a fourth consolidator that is family owned (Campers Inn) but they do maybe a couple of deals each year, too small to matter. Most of the dealers are family owned and a lot are looking to retire, there are 2,200+ dealers for three real consolidators to choose from, thus driving buying power.
Other reasons include: the business is highly cyclical for these independent mom and pops, and there are typically fewer franchise rights unlike an auto dealership where you may have a right that you are the exclusive Mercedes dealer within 30 miles. CWH's scale gives them buying power over manufacturers.
For multi dealership chains with a solid brand and ops in great markets these deals can move up to 5-5.5x, but the average multiple is in the 3-3.5x range, this is confirmed by what CWH and LAZY say at 2-4x, and confirmed by a few M&A bankers in the space.
As expected, some are catching on to the story, RV Retailer LLC launched in January of 2018 led by a couple of early AutoNation execs, RVR now has over 50 dealerships… Lazydays (LAZY) is a microcap with a similar rollup strategy, buying or building ~8 dealerships per yr on a go forward basis. This model works, Lemonis has been doing it for two decades and has become a billionaire from it.
Lemonis recently said this is one of the best times for M&A he’s seen, citing dealer’s inability to procure necessary inventory, and owners seeking to sell in an up cycle. Our checks confirm that M&A multiples have not moved up.
CWH has been active, announcing at least a couple of deals nearly each week. CWH closed 2020 with 160 dealerships and 10 service and repair centers, CWH said on their last call the goal is to get to 200+ by YE 2021, they are putting their massive FCF to work at very high ROIC.
As CWH said at their investor day: Greenfields are in the black in 12-18 months - $1.7-$2.7M cash outlay - 25-30M sales at maturity - 6-7% contribution 4-wall EBITDA margin before 500k in warranties and other high margin sales.
On a fully integrated basis, CWH is paying ~2x EBITDA for new dealerships (M&A and greenfield).
CWH is not too cyclical for a rollup story, we think CWH can run with 1x leverage and still grow FCF/share mid-teens over the next 7-8 years (and still have plenty of excess FCF).
CWH’s competition is weak
Most of these mom-and-pop shops are far less sophisticated operators. CWH has built a moat around its business through its Good Sam loyalty program for RV enthusiasts, which can be compared to Costco. CWH is also a one stop shop for any necessities/accessories/consumables/maintenance repair for the RV lifestyle, CWH does not just sell you an RV and never see you again. Most RVers trade up after ~3 years.
CWH has better marketing muscle, better buying power with manufacturers via leveraging scale for better prices, and in times like these CWH is a priority and able to procure inventory much better than competitors, manufacturers will always treat their best customers well. CWH can push price in this environment and margins will expand throughout 2021.
When buying mom and pops, CWH, through an intense selling focus, can also drive gains in high margin Finance and Insurance conversion and add members to its Good Sam flywheel.
RVing is a growth industry
RV ownership has increased over 62% in the last twenty years. Per RVIA data, RV shipments have grown 3-4% since 2000, and 4.5% since 1981. ASP growth of 2% per annum since 2000 as well.
As of a couple of years ago there were ~80M US households with at least one active camper in the household.
An incredible 9.6 million households intend to buy an RV within the next 5 years. Among current RV owners who plan to buy another RV in the next five year, the numbers for Millennials and Gen Zers stand out, with 84% of 18-to-34-year-olds planning to buy another RV, with a 78% preferring to buy a new model.
Source: Go RVing RV Owner Demographic Profile | RVIA
There are roughly 11.5M RVs in the US. There are typically ~480k RVs sold each year.
But, if you believe COVID has sparked a new appreciation/discovery of the outdoors – which we think is absolutely true – then both 80M households with an active camper should grow and the penetration of that camper base that crosses over to buying an RV should increase – it is reasonable that COVID will cause/push 3-4% of campers to pulling the trigger on an RV, this would mean potentially 3.3M more RVs need to be added to the fleet, and on RV sales of typically 480K this means a long tenure of strong RV sales.
Dealers have been having a very tough time procuring inventory for the last few quarters, this has led to many RVers delaying upgrades into 2021 and perhaps 2022, which should be a continued source of strong demand.
There is also a sort of viral effect as RVing has taken off – studies show that most RVers thoroughly enjoy the lifestyle once exposed. They will share on social media or invite friends – thus significantly growing the reach of RVing. Also, the rapid growth of Peer-to-peer RV rentals will introduce more people to the lifestyle in which over 60% typically go on to purchase an RV.
CWH and LAZY both said SSS were up double digits in Jan/Feb 2020 even before the pandemic.
WGO expects mid single-digit retail sales growth in 2021 with potential for HSD growth, similar to other leading forecasts such as Strategy Titan.
Even dealers in the north (with winter) are saying ~75%+ of new inventory units sell the first week. Supply still can’t keep up with the demand for RVs.
55% of new campers since the pandemic are millennials – millennial penetration has been increasing for a few years, this is a key category where penetration has room to rise and could be very impactful. ~10k boomers retire every day which is very bullish for the RV industry, with a record high stock market and home equity values.
Work from anywhere could be another big tailwind for RVs.
A 2014 Vacation Cost Comparison prepared by PKF Consulting USA showed that a family of four can save 27-62% on vacation costs by traveling in an RV, even when factoring in ownership costs and fuel. For a two-person traveling party, savings are 11-48%. Even when fuel prices rise, more than 80% of RV owners say their RV vacations cost less than other forms of travel.
Just last year, the government passed a $9.5B over five years spending bill to invest in the nation’s national parks and outdoor recreation.
What is CWH worth? CWH is as good a business, if not a better one than CarMax
CarMax (KMX) is the leader in the fragmented used car dealer industry, with scale and likely best in class operations.
CarMax has grown EBITDA per share at an 11.6% CAGR (3x) since 2011 (stock up 5x) (they bought in 25% of shares out) vs. nearly 20% EBITDA per share CAGR for CWH over the decade through 2021. KMX trades at 22x fwd EPS and 14x fwd EBITDA (backing out $13B loan book from the balance sheet which is non-recourse).
KMX GMs and EBITDA margins of 13.5%/7% vs. CWH high 20s/ 8.5% (over the cycle).
CWH is more cyclical but over the long term we think CWH will grow EBITDA and FCF per share at higher rates than KMX. KMX earns mid-teens returns on capital vs. CWH likely 30%+. ~25% of KMX operating income is from its $13B loan book where it underwrites loans for customers with avg credit scores of over 700. This loan book is stated on the KMX balance sheet but is non-recourse to the company. KMX’s finance arm only has to put up ~6% equity and earns a 3% spread, thus earning something like 40% ROE in most years (assuming defaults don’t spike).
CWH has a wider moat over competitors, an equally attractive runway for share gains, and more attractive economics for rollups/capturing that market share. The lifetime value of a customer is higher for CWH than KMX. CWH gets customers on Good Sam driving recurring revenue - selling them on warranty, roadside, consumables/necessities/accessories for the RV, high margin parts and service, upgrade every ~3 years, etc. CWH trades at 40% of the KMX EV/EBITDA multiple.
CWH has 2.1M loyalty members which feeds a lot of highly recurring and high margin spend. Over half of gross profit is not cyclical.
YE 2021 net debt for CWH should be ~$550-600M or so ex floor plan. Over 65% of SG&A is wages bonuses and commissions – and another 6% is marketing. CWH can take a lot of costs out quick in a downturn – as long as CWH keeps net leverage 1-1.5x they will weather downturns and may even be positioned to make even more accretive acquisitions.
As Lemonis said at a 2017 Stephens conference:
And we know that during the last downturn, we were able to buy $1 billion worth of revenue for no multiple. We had floor plan lenders and banks calling us saying, "This guy's going out of business."
CWH shouldn’t trade at a massive discount to KMX because of cyclicality. CWH should continue to deploy a lot of capital at ~30%+ ROIC and continue to grow EBITDA per share at mid-teens. We think Lemonis will continue to open up 30-40 dealerships per year – and wouldn’t even come close to using all of his available capital. These dealerships will do $2.5+ in EBITDA per year. CWH’s competition are almost entirely less sophisticated mom and pops.
Lemonis recently upped his 2021 adj EBITDA guide by $155M to $640-$690. 88.5M shares at $35 is $3.1B mkt cap, ND of ~$550M in a year. The street is at the following for 2021/2022 Revenue and EBITDA:
2021 – $6.1B/$670M
2022 – $6.35B/$669M.
We are paying ~5.7x EV/EBITDA for a dominant wide moat business run by a great owner operator, with great prospects for mid-teens EBITDA per share growth (even if its lumpy leverage won’t be a problem).
2021 Street estimate - $670M adj EBITDA
-75M interest
-15M SBC
-35M maintenance capex (vs. 60M D&A)
-145M taxes (28%)
FCF (before growth capex) = $400M / 88.5 = $4.52/sh
We think FV is 15x or $67.80/sh. We think there is upside to that value if this is a super cycle / 2-3+ year strong trend, then we suspect the market will eventually figure out CWH is a better business than KMX rerate it to a multiple a lot closer to KMX or something like 18x FCF – which on potentially $5 in 2022 FCF is an $85 stock.
If you think $4.52 FCF is peak and the reset is 20% lower (conservative bc CWH is investing its massive FCF into high ROIC projects…) or $3.62/sh in FCF, CWH will grow at mid-teens over the LT which should easily warrant a conservative 15x, or a $54.24 stock. The historicals say 8.5% is an achievable EBITDA margins average over the cycle.
CWH Compounding Economics
We think CWH can deliver a low to mid 20s% IRR over the next ~7 years.
CWH has Hidden Assets and Catalysts
The above valuation ascribes no value to currently non-earning initiatives that are set to launch in the coming months, including P2P rental platform, online, or the halo effect if “Electric World” is highly successful. Importantly, these “ventures” are very capital light investments.
We think CWH’s coming P2P platform should be valued at $500M today, one of the two leading P2P camper rental platforms Outdoorsy is rumored to be a potential multibillion dollar SPAC (unconfirmed but this makes sense), CWH has been gearing up for a year to launch its Good Sam P2P rental platform – CWH has 2.1M Good Sam members, 5M active customers, and a 20M customer database, CWH is starting with fees well below peers and has the ingredients to drive a dynamic rental platform which could be worth $1-1.5B in a few years, and strengthen CWH’s moat/grip on the industry – including driving customer acquisitions up and CAC down. At $500M FV today this would add another $5.70/share with potential to add $10-$15 if highly successful (30-45% of the market cap).
Lemonis is focusing on online RV buying, for which he has very little if any real competition here – he could potentially dominate online and drive further market share gains with very little incremental capital spend. With his scale/logistics/reach (Lemonis said they will have next day delivery) CWH could be successful and even get a Carvana halo effect, Lemonis said online margins will be in line with the existing business.
CWH is launching Electric World in ~July, which will sell Recreational Electric vehicles including electric trucks not just RVs –– CWH believes they will have an important first mover advantage a fully licensed dealer.
Other - The floor plan facility should not be counted in the EV, CWH has a $1.2B 2023 TL they are paying 3.5% on, and RV Retailer LLC just did a 2028 TL at L+4% with LTM PF 4.3x leverage.
CWH has a $100M repo authorization which they will likely use, would love to see them take out 3-4% of the shares each year – although the float is not large. PE firm Crestview has been in this for a decade and still owns a lot, they have sold some stock – probably had to harvest some gain.
Seth Klarmin’s protégé David Abrams owns 5.1M shares (12% of the float), having been involved since 2018.
Nearly 20% of the float is sold short.
Conclusion
The market clearly doesn’t recognize the quality of the CWH business and that this is a compounding machine. We think the only thing that could stop it is a prolonged extremely weak economy or $5 gasoline prices.
