One of the big winners of the March lows is Camping World Holdings (CWH). The stock bottomed at $5.81 and has skyrocketed to $27.81 over the last three months. At a current market valuation of $2.5 billion, how much upside remains in CWH?
I purchased shares at $18 and I think it is almost time to sell shares in this high-flyer. I will highlight some of the recent developments in the recreational vehicle (RV) industry to substantiate that the macro trend towards camping is a real trend. However, I am unsure if this trend is the beginning of a multi-year supercycle.
Camping World is the largest retailer of RVs. There are 120 locations in 36 states.
CWH is the largest retailer of RVs and the company sells new and used RVs.
Camping Macro Trend
One of the reasons for the recent parabolic rise in the shares of CWH is that the company actually benefits from Covid-19.
Prominent short seller Marc Cohodes laid out the bull thesis for CWH in a recent interview. Cohodes highlighted that camping is one of the only options for families to take a summer vacation.
Look at this summer: no baseball, no summer camps, no cruising, no trips to Europe,” Cohodes said. “What there will be is camping. Camping is going to be a big theme.”
Cohodes said that CWH is the behemoth of the industry that will most likely take market share from smaller retailers that go out of business.
The biggest factors driving RV sales, he argues, are interest rates and fuel prices and both are acting as macro tailwinds for CWH.
When RV stocks go, they go big and they go hard,” Cohodes said. “These stocks are hugely profitable when they work, and not great when they don’t work. I think the super-cycle is in front of us.”
The RV Industry Association (RVIA) reported a steep decline in wholesale shipments in May 2020. Wholesale shipment totaled 27,999 units, down (-29.7%) from the 39,838 units shipped in May 2019. However, these statistics are little misleading as some states still had the stay-at-home orders in full effect.
While numbers compared to last May show a 30 percent decrease, the reality is the RV industry is very strong right now. Many RV dealerships that were able to reopen their showroom reported record sales, but RV sales were heavily dependent on whether or not state stay-at-home orders had been lifted, something that varied state-by-state throughout the month of May,” said RV Industry President Craig Kirby. “Now that all states have reopened, coupled with continued media attention on RVs as a way to travel and maintain social distance, the outlook for the RV industry this summer is extremely bright.”
Thor Industries (THO) also echoed some of the positive sentiment. During the Q1 conference call, President Robert Martin said,
Today, market indicators in North America are increasingly positive. Every North American dealer I have spoken to in the last few weeks has been very excited about the pace at which sales are picking up. Many of our dealers are reporting a significant improvement in sales from April to May and are excited about the sales potential for June and beyond.”
Source: Thor Industries Press Release
In May, CWH reported first-quarter results. Revenue declined by 3.5% to $1.03 billion. The drop was partly due to the impact of Covid-19.
Gross margin in the period increased from 28.1% in the quarter a year ago to 29.5%. Basically, CWH has been closing unprofitable locations and margins have improved despite the pandemic. Earnings per share adjusted for the store-closing costs and asset impairment were break-even. Analysts were expecting a loss of $0.06.
Perhaps most encouraging was the strong sales momentum in May. CEO Lemonis said on the most recent conference call,
As we sit here today, I’m proud to tell you that last weekend, our Friday, Saturday and Sunday in May was the biggest weekend in our company’s history, period, end of story, in all aspects, every part of our business. And so we feel good about where those trends are going.”
Source: CWH Conference Call
Once we take into account different data points from the RVIA, Thor Industries and the Q1 conference call, it is clear that sales of RVs are surging. However, I still don’t know how to model the Q2 and Q3 sales. There is not enough information to estimate whether the camping trend has accelerated.
I think a lot of the recent parabolic rise can be attributed to short covering. Camping World is a heavily shorted stock. 22% of the float is short. In addition, the short volume ratio is 21.9%. Obviously, some of the recent run-ups in the share price have been the result of a short squeeze. However, CWH is still a heavily shorted stock despite rising from a low of $5.81 to $27.81 in recent months.
Another catalyst that jolted the shares higher was insider buying. CEO Marcus Lemonis made waves in March when he purchased 200,000 shares of CWH. It is interesting to note that Lemonis bought even more stock in June after the stock had tripled. He bought another 37,475 shares at $21.27.
CWH is a $2.5-billion company with an Enterprise Value of $5.22 billion. The EV/EBITDA ratio is 78X. The company does not have a long history of profitability. Even while the economy was strong in 2018 and 2019, CWH lost money. Over the last few years, the industry has been saddled with high inventories and aggressive price discounting. There simply was not enough aggregate demand for RVs.
Prior to the pandemic, earnings estimates were $0.52 for 2020 and $1.13 for 2021.
Total revenue in 2019 was $4.9 billion and in 2018, total revenue was $4.8 billion. At almost 1X Sales/EV, CWH shares are expensive for a retail operation.
CWH is a heavily-indebted company. The company has $1.15 billion in debt that is due in 2024. The company pays out $15 million in interest expense per quarter. This is significant because operating income in Q1 was only $13.2 million.
The company also has $846 million of Floor plan debt. The company has $1.43 billion in inventory that is used to secure the Floor plan debt.
After a parabolic rise over the last 3 months, is there any more upside at CWH?
First of all, competing travel options are still not available. For example, I am yet to see a strong rebound in hotel occupancy. Channel checks suggest that occupancy is still down 75%. Similarly, airline capacity utilization is a fraction of pre-Pandemic levels. Disney (NYSE:DIS) workers have petitioned to not reopen the theme parks. There still remain few options for family activities even though the lockdown is over for the most part.
As far as other travel options, the pickings are slim. Europe has closed its borders to American travelers and I expect that to extend into the late summer. The cruise line industry is also not a viable option this summer. RCL aims to resume cruises in mid-September.
I think the macro environment will support a strong summer of sales for CWH. However, my finger is on the sell button. I think the shares already represent a lot of optimism about the camping macro trend. I will have to see more evidence that the trend is a multi-year trend that will extend beyond 2020 to get more bullish on the share price.
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.
Originally published on Seeking Alpha