Tenting World Inventory: Purchase This Potential Compounding Machine (NYSE:CWH)


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Camping World Holdings, Inc. (CWH) is a stock I’ve owned for several years. I’ve bought stocks opportunistically and also reduced some of my positions at various times. However, I maintain a core long position.

I first heard about CWH from a neighbor in Southern California who had bought a Class C RV for family trips. Another friend of mine (a geologist living in Idaho) had bought a Class B vehicle. Both people spoke enthusiastically about their experiences in dealing with CWH.

Then the social media chatter about the company got pretty lively. Pre-pandemic discussions have ranged from “megatrends colliding” to observations of the potential of the total addressable market (or TAM) and all the way down the food chain to shifts in consumer behavior related to vacation travel.

The growth story

In my humble opinion, the development of Camping World’s story is both subtle and significant, and a company that is now firing on all cylinders. It also takes vision and execution to continue driving a growth story.

With Chairman/CEO Marcus Lemonis at the helm and a very dedicated management team supporting him, CWH has evolved from a pure-play recreational vehicle dealership into a uniquely integrated one-stop-shop recreational vehicle ecosystem.

Data from YCharts

Strategic and synergistic acquisitions along with vertically integrated and complementary products/services have made CWH the de facto leader in recreation and recreational vehicles/camping in North America.

Management was very skillful in doing business. “Door” acquisitions tend to be very market specific (regional) with multiples ranging from 1x to 4x historical earnings of the target being acquired.

However, on the recent third-quarter earnings conference call, Mr. Lemonis made an interesting point about how he and his team approach the potential synergies of each deal.

“If you really look at the math of everything and look at the full impacted multiple in a 12-month to 24-month forward-looking chunk after imputing all of our efficiencies and all of our savings and all of our b. rebates etc., we believe that the multiple decreases between 1x and 2x. We’re not reporting it that way because we feel investors should hear what the true multiple is and the true cash spend applies to this acquisition, but to be honest we actually know we’re improving on that materially which allows us to continue making these at such a fast pace.

In addition, you have the Good Sam entity that uses the entire downstream channel of CWH’s ancillary markets.

With CWH and subsidiaries, you now have RV sales (new and used), rentals, repairs/services, warranty plans, financing, affiliated campgrounds, etc.

The Debt Relief Story

As with any company entering a growth phase, either organically, through acquisitions, or in this case a combination of both, a management team must manage adequate liquidity. It takes capital to make capital.

Public companies raise capital primarily by issuing equity or debt/instruments through bonds, credit facilities, secured loans, and so on. CWH has taken a very balanced approach to its financing needs.

A positive feature of CWH’s financial profile is the company’s free cash flow to debt ratio. In the 5-year chart below, you can see a dramatic improvement in the company’s FCF/debt ratio after fiscal 2018. This also equates to a spike and a decrease in total long-term debt over the same period.

Camping World Free Cash Flow to debt and long-term debtData from YCharts

At first glance, that tells me that CWH’s debt is not only manageable from an accounting perspective, but also points to potential tailwinds for further deleveraging.

Another positive indication of the potential to improve liquidity comes from comparing CWH’s debt-to-equity ratio to the CFO-to-debt ratio (below). Although leverage is up more than 33%, it is dwarfed by the +484% change in operating cash flow/debt.

Camping World debt to equity and CFO to debt ratioData from YCharts


The best part of the CWH story going forward is a unique multi-prong capability and opportunity for amazing cash flow generation. The company has evolved into a diverse but complementary operating structure, in large part due to shrewd and strategic management. Going forward, the potential for generating revenue is significant.

It doesn’t hurt that management is also interested in returning capital to shareholders. With an expected dividend yield and P/E of just over 5% each, you’re getting growth, value, and income. Although some quantitative analysts give CWH low marks for dividend security, its payout ratio of less than 30% piques my interest.

In terms of yield quality, I feel like CWH passes the sniff test in good fashion. CWH’s Sloan (Accrual) Ratio for the year ended December 2020 was -15.34% (mainly due to changes in cash flow from investments). For the quarter ended September 2021, the Sloan ratio was +6.42%. This tells me that CWH has modest non-cash or accrued income relative to its cash flow. In other words, no obviously messy accounting distortions.

I also consider the risk of impairment for CWH (at this point in time) to be low. A representation of this reasoning can be seen in the graphic below. Although goodwill/intangible assets have grown significantly in recent years, they only make up 13.6% of assets.

Camping World Goodwill and IntangiblesData from YCharts


What could disturb the apple cart? The usual suspects, in no particular order: rising oil prices; rising interest rates; ongoing supply chain disruptions, etc.

I would also keep an eye on the above goodwill/intangible assets and accruals. Should the share of intangible assets in assets increase dramatically, the potential for impairment and amortization increases. Depreciation is not a cash burden, but it destroys equity.

The same applies to provisions. Cash earnings are always superior to reported engineered earnings. Using the Sloan Ratio as an example, a range of -10% to +10% is appropriate for the valuation of companies in the consumer goods/auto retail sector. Anything below or above -10%/+10%, investors should take a closer look at the yield construction.

CWH Short Interest is another problem, but not a deal breaker. At nearly 25% float, the brief pessimism (for this writer at least) is in stark contrast to the company’s recent and improving fundamentals. On one hand, unless the shorts get squeezed, the stock will likely be range bound. Inconvenient, but tradable.

Conversely, further improving fundamentals should be a catalyst for short position coverage… and a likely higher share price. Also to note: In addition to borrowing costs (when selling a stock short), short sellers must also pay the dividend to the lender (usually the broker).

Final Thoughts

I value a company’s senior and operational management team. Under CEO Lemonis, CWH has/worked extremely well. Growing market share usually comes at the expense of profit margins, but Mr. Lemonis & Company seems to understand the balancing act. That is:

Expand your installed base, seize opportunities (vertically and horizontally) and create a legacy business that drives future growth. The shareholder-friendly management is the icing on the cake. However, this cake should have a layer of a strong and healthy balance sheet.

So far, the spate of recent “door” acquisitions appears to have positive attributes, inspiring confidence that maintaining a healthy balance sheet is a management focus. Cost control is a given, but when push came to shove, I’d choose deleveraging over dividend cuts any day! But I am.

Not that a dividend cut is imminent, but CWH management reminds me of a quote from Warren Buffett:

“We will reject interesting opportunities rather than leverage our balance sheet too much.”

At the end of the day (and barring unforeseen negative macro events), I’m betting that CWH will be a compounding machine going forward. In the meantime, enjoy the value, grab the yield kicker… and let it ride!

At the close on Jan 18, 2022, CWH is down -8.2% YTD versus -2.1% for the S&P 500 Index. I currently have a full long position in CWH but would recommend opening or topping up CWH to $36 and am considering taking a full position to $34.