What a brutal six months it’s been for Camping World. The stock has dropped 30.6% and now trades at $16.87, rattling many shareholders. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Camping World, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons why there are better opportunities than CWH and a stock we'd rather own.
Why Is Camping World Not Exciting?
Founded in 1966 as a single recreational vehicle (RV) dealership, Camping World (NYSE:CWH) still sells RVs along with boats and general merchandise for outdoor activities.
1. Shrinking Same-Store Sales Indicate Waning Demand
Same-store sales is an industry measure of whether revenue is growing at existing stores, and it is driven by customer visits (often called traffic) and the average spending per customer (ticket).
Camping World’s demand has been shrinking over the last two years as its same-store sales have averaged 14.6% annual declines.
Note that Camping World reports its same-store sales intermittently, so some data points are missing in the chart below.
2. Weak Operating Margin Could Cause Trouble
Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Camping World was profitable over the last two years but held back by its large cost base. Its average operating margin of 3.4% was weak for a consumer retail business. This result isn’t too surprising given its low gross margin as a starting point.
3. High Debt Levels Increase Risk
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Camping World’s $2.47 billion of debt exceeds the $208.4 million of cash on its balance sheet. Furthermore, its 9× net-debt-to-EBITDA ratio (based on its EBITDA of $261.4 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Camping World could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Camping World can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
Camping World isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 18.8× forward price-to-earnings (or $16.87 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better investment opportunities out there. We’d suggest looking at our favorite semiconductor picks and shovels play.
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