December 1, 2020

Starting To Buy Camping World (NYSE:CWH)

I highlighted my sale of Camping World Holdings (CWH) earlier this summer. I thought the share price at $30 was starting to get a little rich. I subsequently sold my shares at $34.

Covid-19 served as a tailwind and boosted camping and RV demand. 2020 has been a summer where most Americans have not taken any international vacations, attended concerts or sports events. It has been the summer of camping.

This week, CWH held their annual investor day. After reviewing the material, I am now more bullish on the company. I think a valuation of $30 is conservative and the company is most likely worth closer to $50 per share. Subsequently, I will be accumulating shares in the $25-30 range.

Valuation is Solid

The company is currently valued at $2.7 Billion. The enterprise value is $5.0 Billion.

The company is now projecting $500 million in Adjusted EBITDA in 2021. Furthermore, the company is projecting adjusted EBITDA growth in the mid-single digits over the next 5 years.

According to the new guidance I think the shares offer a compelling valuation with a margin of safety. If you apply a 10X multiple to the EBITDA projection you get a stock price of over $50/share, a 66% increase from current prices.

The company is expected to earn $2.62 in fiscal 2020. This equates to an 11.4X PE ratio.

In the last quarter revenue increased 9.0%, or $132.4 million, to $1.607 billion. Adjusted EBITDA increased 122.5% to $220.7 million.

On September 17, the company hiked the dividend by 75%. The dividend yield going forward will be 3.1%.

Insider Buying is Bullish

First of all, CEO Marcus Lemonis has continued to hoover up shares all summer. On an almost daily basis, he has been buying shares in the open market at prices as high as $37/share.

Source: Fintel.io

Risks and Challenges

There are a lot of CWH bears with almost 24% of the float sold short. The bear case is that CWH is an indebted retailer with a short term tailwind. In other words, by next spring, the camping trend will be over and the company will limp along with anemic growth.

Bears believe that the $500 million of EBITDA is “as good as it gets.” The bears do not think that CWH can meaningfully grow the EBITDA after 2021 without the macro tailwind of Americans camping instead of traveling to hotels. Most analysts expect a solid 2020 and view the revised EBITDA targets as attainable. However, there is still some skepticism that the macro tailwind will disappear by 2021. It should be noted that the previous macro tailwind after September 11 lasted 3-4 years.

I think the risk that the camping and RV trend is a fad is already priced in to the shares. If I apply a low multiple of 8X EBITDA, the stock would still be valued at $35. There is a margin of safety that should insulate my downside risk.

An Airbnb For RV’s?

Camping World also announced a new Airbnb style business for the rental of RV’s. Camping World already has a critical mass of 2.1 million Good Sam members who pay $29/yr for fuel and campground discounts. The company also has a database of ~5 Million customers which is almost half of the entire U.S. market of ~10 million RV’s. If someone owns an RV, there is a high probability that it was purchased at Camping World.

An Airbnb business could be highly lucrative. Hosts are charged 3% and guests are charged up to 20% of the booking fee. If one were to imagine an RV rental business with 4.3 million trips per year (10% of Airbnb), this could amount to booking fees of ~ $450 Million/yr.

4.3 million trips * $450 Avg Rental * 23% Fees = $445 Million

This is an opportunity for a half billion dollar business with incredibly high margins. However, creating an online marketplace is not an easy task. Thus, I consider this business venture as more of a lottery ticket.

Bottom Line

Camping World shares are a natural hedge for most portfolios that have Covid-19 risk. It is possible that consumers will be hesitant to return to air travel and hotels for several years. Under such a scenario, CWH would be a prime beneficiary and offers an upside of 65% vs. a downside risk of 15%.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in CWH over the next 72 hours. 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.

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