Camping World: raise my price target to $100 per share (NYSE: CWH)
Between the increase in share buybacks, the long-term outlook for the RV market, and the company expecting to reach nearly $1 billion in EBITDA in 2021, I raised my price target for Camping. World Holdings (NYSE: CWH) at $100 per share. For starters, the RV market appears to have entered a new phase of growth with unaffordable housing and remote working starting to draw consumers into the space. Second, the Camping World network and Good Sam Club allow the company to generate more gross profit and EBITDA. Finally, if Camping World continues to trade below $34 per share, the company could buy up to 10% of its Class A float in 2022.
The new growth drivers of the RV industry
The RV industry appears to have a healthy 5-10 year growth ahead of it as the pandemic has brought new growth drivers to the industry. The first driver is the massive demand for remote working which will allow greater flexibility of movement among workers. A FlexJobs survey found that 58% of respondents wanted to work remotely full-time post-pandemic. As employers turn to this demand for remote work to retain their human capital, it is very likely that remote work and virtual meetings will become a new norm. The increased flexibility of working from home allows individuals to not only take more vacations, but also to essentially work from anywhere and stay as long as they want. Brian Chesky, CEO of Airbnb (ABNB), even said that due to remote working, we are about to undergo a “travel revolution”, which will also greatly benefit the RV industry. The second factor that will accelerate the growth of the RV market is that RVs are becoming an alternative form of life. As housing prices in North America soar parabolically, combined with high rent rates in major US cities, more and more Americans are deciding to make the switch to RV living. For these reasons, the recreational vehicle market CAGR is expected to be around 7% from 2022 to 2027.
The value creation of the Good Sam Club
Now that we’ve reviewed the growth drivers of the RV industry, it’s important for me to point out that Camping World is much more than just an RV retailer. Camping World is a one stop shop for all your outdoor retail needs. The company offers travel assistance, RV appraisal, insurance programs, and more. Additionally, Camping World’s Good Sam Club segment shows how the company can increase customer loyalty, customer acquisition and company EBITDA. First, the Good Sam Club segment currently has a gross margin of 85%. Second, growth in the number of new members could eventually incentivize individuals to purchase a new RV, which would increase the company’s gross profit and EBITDA. The next image below is the potential value creation of the Good Sam Club segment if only 5% of their membership growth between August 2020 and August 2021 were to make a new RV purchase in 2022. I used the profit gross per new vehicle sold which was found in the company’s recent earnings report and used an EBITDA per unit margin of approximately 13%.
Source: author’s calculation
As you can see, a simple conversion of 5% on the growth of new members of the Good Sam Club could add 7% growth to the company’s EBITDA. Finally, that’s not even taking into account the full potential for EBITDA growth if the RV industry continues to grow at a healthy pace and Camping World maintains its impressive customer acquisition strategies. Therefore, it is important for investors to remember that Camping World is not just another RV retailer, as its value proposition in being a one-stop-shop for all your outdoor camping needs creates brand loyalty. which gives them a competitive advantage.
Increase in the effects of the share buyback program on my new target price
In addition to the positive outlook of the RV industry and the competitive advantage of Camping World, Camping World pays investors very well. The company has just increased its Class A common stock buyback program by an additional $152 million. They are currently paying a 6% dividend and they are still able to acquire more dealerships to sustain their growth initiatives. Between expanding net income and increasing stock buybacks, there are enough catalysts to justify my $100 price target. The following is simple arithmetic used to calculate potential Camping World returns with reduced float and potential BPA expansion.
Source: author’s calculation
Based on a worst-case, medium-case, and best-case scenario for Camping World net income in 2023, my base-case scenario has an upside of about 67%, my median-case scenario provides 170%, and my best-case scenario provides me with a return of 256%.
Camping World Holdings is considered a deep value play in my opinion when comparing the company’s EV/EBITDA to its peers. Currently, Camping World has a lower EV/EBITDA than all of its closest competitors.
Additionally, Camping World has a higher return on total capital than Seeking Alpha’s 5 closest competitors.
Source: Alpha Research
The final consensus reached is that Camping World is heavily discounted given the company’s low EV/EBITDA multiple and industry-beating returns on total capital.
Fed Taper poses a risk to the camping world
Camping World faces the risk of the Federal Reserve’s recent hawkish tone, as higher interest rates could reduce the amount of spending within the US economy. In December 2021, Federal Reserve Chairman Jerome Powell said he expects to see an acceleration in the reduction in bond purchases in 2022. If the Fed continues to pursue its hawkish agenda, I see that this could give headwinds to new Camping World RV sales. as higher interest rates and less fiscal stimulus lead to reduced discretionary spending. That being said, this risk factor affects all recreational vehicles and cyclical growth stocks. Moreover, given our current macroeconomic conditions, one wonders how long the Fed’s hawkish policies can be sustained. If you’re of the opinion that cyclicals should make up a very insignificant proportion of your portfolio given current market circumstances, you might want to look beyond Camping World and find something else. Macroeconomic risks aside, Camping World as a company seems to have a lot of work in its favor right now.
To wrap up my bullish thesis on Camping World Holdings, the company has the competitive advantage of being a one-stop-shop for all of your RV and outdoor needs. Additionally, the RV industry has an incredible prospect between remote work and alternative housing. Finally, the new buyback program and monster yield provide shareholders with adequate rewards to improve long-term returns. I believe Camping World can double the principle of investors if they are able to get around $30-40.