Description

Two RV names (CWH / WGO) have been written-up recently as longs, below I will present the case for taking the other side with Camping World Holdings.  Considering there is another recent write-up, I will forgo some contextual background information.  Suffice to say, Camping World is the largest RV retailer in the US.  To be clear,  Camping World has done a fine job building its franchise to ~180 dealerships.   That said, I believe the company has both higher fixed + financial leverage which amplifies the cyclicality of its business in an industry that inherently is plagued by severe cyclicality.   In effect, as I will show later, the equities similar to their traditional auto industry counterparts act as high beta expressions of the RV cycle with only idiosyncratic nuances.

The Cycle

As with various other companies & industries (e.g. Peloton, Wayfair), the RV industry was a clear beneficiary of the COVID pandemic.   The combination of ~$5 trillion of stimulus dropped onto the economy, record low interest rates (~70% of purchases are financed either directly or indirectly through alternative means such as a home equity loan), and liberal new remote work policies, one could not think of a more favorable backdrop for the industry than the one which we just experienced.  That is over.

Taking a very long-term view, the RV industry has grown wholesale shipments at ~2.5% annually since the mid-1970s with very clear boom-bust cycles.  Looking at the cumulative time spent above/below trend, it stands to reason that the RV industry pulled forward future demand during COVID that was only surpassed by the 2000-2007 cycle.  

Looking at near-term data, wholesale data for September was recently released per the RVIA.  Monthly RV shipments for September declined (16%) m/m, this compares to normal seasonality of (6%) m/m declines  YoY unit shipments are now down (49%) y/y, including (54%) for towables.   YTD shipments are down (8%) vs 2021.  There are still 3 months to go in the year, but notably LTM shipments total 563k units and are still above the historical trendline of 450k units.  

Retail data is released on a longer lag time.  In August, M/M units were down (9%) compared to normal seasonality of (7%).  From a unit's perspective, the chart below shows that 2022 is the worst sales environment since at least 2016.  Y/Y retail demand was down (18%) in terms of units, including (19%) for towables and (10%) for motorhomes.   August on a y/y basis is a slight improvement from July which registered (25%).  That said, we are now starting to post double-digit declines on top of double-digit declines as retail demand started to weaken in 2H 2021.  YTD retail demand is down (23%) y/y compared to wholesale shipments down (3%).  Compared to the 2019 baseline, retail demand is down (8%) so far this year including (17%) in August.   

Another layer of analysis we can conduct is the approximate flow of inventory at retailers.  The industry went through an inventory correction /  retrenchment during 2018-19.  This led to a super-cycle bonanza for OEMs and retailers alike amidst the surge in demand during COVID.    Pricing power went through the roof due to limited availability and inability to ramp supply in such short-order to meet demand, with margins following suit.  Per the chart below, I estimate that the industry has effectively rebuilt the inventory it lost during the surge in demand, and up until the very extreme cut in product late summer 2022 had effectively rebuilt inventory back to the level preceding the last industry correction.   Even with the dramatic cuts to production / wholesale shipments, the second table below shows that given the inherently weak retail demand these cuts are generating a below-normal/seasonal response in inventory.  Note: This problem is particularly acute for towables which suffered fewer supply constraints than motorhomes.

Finally, performing traditional cyclical analysis on the equities as to how they perform during various stages of the cycle, we break down industry performance into four stages – recovery, expansion, slowdown, recession.   The key point is that the equities – OEMs and retailers alike – are allergic to deterioration in the 2nd derivative in growth.   Translating what this means for CWH, while relatively small sample size since 2016, one can see that the equity significantly underperforms during down cycles.   

The Consumer / Macro Backdrop

There is not a lot of ‘value-add’ here, but simply would like to point out a few factors that may play a role in RV sales prospectively.   

• Real incomes are under pressure.  Despite record low unemployment and strong wage growth, inflationary pressure has caused the personal savings rate to drop to historically low levels.  The combination of these pressures with the implications of an aggressive Fed tightening cycle in an industry dependent upon credit availability point to continued downward macroeconomic pressure on the industry

• The housing industry is frozen.   Transactional volumes have plummeted to 30-year low levels, and homebuilder sentiment has collapsed.  Why does this matter?  Historically there is a strong leading link between housing and employment.   TBD whether this cycle ‘will be different,’ but odds are that we will see at least some deterioration in the employment situation prospectively.

• Energy Prices - this represents another ‘unpredictable’ macroeconomic variable, however, risks skew to the upside following the election and cessation of SPR releases.    Domestic inventories have collapsed and the production response is non-existent.  Looking at historical correlations between domestic inventories and prices, the picture points to prospective risk of higher prices.  How will RV sales hold up if gasoline & diesel prices return to the $5-$6/gallon level seen earlier this year.

CWH Normalized Earnings / Valuation

Camping World has been opportunistically expanding its presence in the industry.  From 91 dealers in 2014, Camping World has ~180 dealerships today.   Given the hyper-cyclicality of the business, it is difficult to assess what steady-state earnings power of the business is.  As shown below, CWH was a large beneficiary of COVID and the tight supply environment (similar to auto dealers).  Gross margin expanded ~700 bps and EBIT margin expanded 800 bps from 2019 to 2021.  All credit due to management for navigating such a volatile and challenging environment, but it is hard to imagine that exogenous factors were not the predominant factor driving results here.    Per the above analysis, the tight supply environment has normalized which is a harbinger of deteriorating retail margins.   

If we were to assume normalized GP/Dealer and haircut SG&A to reflect a more challenging environment, normalized earnings may prove to be closer to $1.75-$2 as opposed to the $6 printed in 2021.   With the stock now trading at closer to ~15x this level of normalized earnings and the cycle clearly pointed lower, the risk/reward for  tactically betting against CWH looks appealing.

Catalyst

• Industry data releases
• Quarterly resports/ guidance