Camping World Holdings - A Growth Story Written by an Exceptional CEO

SUMMARY

Camping World has been outperforming the market since its IPO in 2016 and will continue on this trajectory for some time to come.
The RV industry is largely fragmented and this fits nice into Camping World’s acquisition plans.
Recreational vehicles become increasingly popular in the US and the company will be in a position to take advantage of the trend.
Marcus Lemonis’ is a brilliant capital allocator and works with investors’ interest at heart.

Introduction

I came to know about Camping World (NYSE: CWH) when I was watching an episode of “The Profit”, an American reality television show in which Marcus Lemonis offers struggling small businesses a capital injection and his expertise in exchange for a stake in the company. One of his selling points to get business owners to accept his offer is this: “It is better to own a small piece of something big than to own a big piece of nothing.” That’s the view we should take as stock market investors!

After the company became public in October 2016 with a starting price of $22, it has since almost doubled in price, far outperforming the broader market index. Let’s take a look at why this company will likely keep up with its accelerating growth.

Business Overview

Camping is one of the most popular outdoor activities in the US, whether it is a tent at a campground, a recreational vehicle or even just the backyard. The rising cost of accomodations, restaurants and other common road-trip expenses has pushed many travelers to consider recreational vehicles as a way to spend in a much more prudent manner. With fuel costs near its lowest levels in years, Camping World is becoming the go-to for all things outdoor. The business does not only offer financing to its customers but also accessories, suppliers and spare parts for maintenance. Since the indsutry that the company operates in is rather fragmented with smaller shops offering a singular service or product, Camping World is in a great position to act as the main consolidator as it seeks to expand not only horizontally but vertically.

According to the RV Industry Association, RV-owning households has grown to a peak of 8.9 million, up from 7.9 million in 2005 which equates to 8.5% of total households owning an RV. What’s amazing is that the trend does not look like it is reversing despite the tough economic outlook. As consumers start to realise that RV ownership is a more cost-effective way to spend time outdoors, industry sales will continue to surge higher.

The strategy that Camping World deploys is remarkable. Knowing that the RV industry has been littered with mom-and-pop retailers all over the country, the company actively seeks out opportunities for acquisitions to boost its footprint. With over 130 centers countrywide and more than 3 million active customers, it seems like the approach to acquire smaller businesses is working. After all, Camping World is not operating its acquisitions as standalone entities; it is integrating them to use their strengths to its advantage in other segments of its business.

On top of horizontal acquistions, the company is also making vertical integrations. For example, the company has announced that it is acquiring Uncle Dan’s Outfitters, a retailer of outdoor specialty apparel, accessories and products, for an undisclosed sum in October 2017. The company has been on an acquisition spree way before it went public and so far, it has served shareholders well.

Camping World also owns Good Sam Club, the industry’s largest membership club, with more than 1.7 million members. Most of its members sign up for access to everything relating to RV from discounted insurance to roadside assistance. The acquisition strategy has been executed perfectly as the cash flows generated from the business can be reinvested into other activities in order to create pricing power over its customers.

Financial Position

If one were to take a look at the company’s financial strength, it is easy to conclude that the business has never look stronger than ever.

According to gurufocus.com, Camping World’s revenue has almost doubled since 2013. As for the latest quarter, sales rose by 25% to $1.24 billion which nearly the doubled the expected growth rate most analysts are expecting. Same-store sales were up modestly by 9.4% with new vehicle purchases and financing and insurance products ahead of the pack.

Sales of new and used vehicles represented 73% of total sales in 2016 and that composition remains roughly similar in 2017. As per previous quarters, the trend seems clearly in favour of new, low-priced RVs especially for first-time buyers. Unit sales of new vehicles climbed by a third to more than 19,100 and revenue from that segment rose by 30%. Number of used vehicles sold increased by just 7% to make up 8,550 units. Last but not least, sales stemming from customer services and plans rose by 2% while finance and insurance revenue skyrocketed by almost 50%.

Asides from acquisitions to fuel its growth, investors can also see Camping World has a potential play on income. While the business consistently pays out a relatively low dividend, it has also been dishing out special dividends. In August 2017, it announced a quarterly dividend of $0.08 with a special cash dividend of $0.0732 per share. While it may not seem like it is making a difference to investors’ returns with a modest dividend, it has healthy growth prospects that may call for future increases.

Risks

Every investment carries a certain amount of risk and Camping World is no exception to that. The company recently went plublic in October 2016 and hence, does not have a huge track record that value investors tend to rely on when doing their due diligence. Hence, we can expect that the company may experience some volatility along the way.

Another risk that investors must deal with is key-man risks. CEO Marcus Lemonis has proven to be a serial entreprenuer on his reality television show and has vested interests in many small businesses that he has invested in. While I do not doubt his ability to grow the business, having a distracted CEO run a business is never a good idea no matter how talented he may be. While the show has provided Camping World some publicity, the reward is not worth the risk. If Lemonis does move on to other businesses, the business performance is sure to take a hit.

The share structure of the business has also placed investors at a disadvantage when it comes to control and voting rights. Lemonis has a reputation of assuming a “100% in control” approach in the businesses that he has a stake in and investors would like to see that he has a 100% ownership mentality when it comes to managing one.

Lastly, we cannot ignore the impact that fuel prices had on the business. While prices may stay low for now, there is no way of predicting when prices would suddenly spike up. And if it does, it could put a dent on the RV industry. With a debt that is ballooning fast on its balance sheet, a slow down in revenue and profit will damage the bottom line.

Conclusion

If the RV industry is in a season of consolidation, it would be great if we are able to own a small stake in the consolidator. In the company’s most recent quarterly earnings call, Lemonis attributed the strong performance to Camping World’s unique business and operating model. The company is in a good place to keep gaining market share in the RV space and has plans to extend its reach beyond the RV market. It is currently aiming to one-stop shop for the outdoor lifestyle that consumers are looking for. Fundamentally, the business is doing well and investors have plenty of good things to look forward to.

Marcus Ho
Research Analyst, Mind Kinesis Value Investing Academy

Disclaimer: Please note that all information stated in this article is just for education purpose only and should not be used as any form of recommendation or advice.

Click here for our Free Value Investing Guidebook :