Camping World’s stock price has taken a beating over the past six months, shedding 35.6% of its value and falling to $4.45 per share. This was partly due to its softer quarterly results and might have investors contemplating their next move.
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Why do we think Camping World will underperform?
Despite the more favorable entry price, we’re cautious about Camping World. Here are three reasons why there are better opportunities than CWH, plus one stock we’d rather own.
1. Flat same-store sales indicate weak demand
Same-store sales show the change in sales for a retailer’s e-commerce platform and brick-and-mortar shops that have existed for at least a year. This is a key performance indicator because it measures organic growth.
Camping World’s demand within its existing locations has barely increased over the last two years as its same-store sales were flat.
2. EPS trending down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Camping World, its EPS declined by 67.5% annually over the last three years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
3. High debt levels increase risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
Camping World’s $2.40 billion of debt exceeds the $224.1 million of cash on its balance sheet. Furthermore, its 8× net-debt-to-EBITDA ratio (based on its EBITDA of $283.1 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 falls short of our quality standards. After the recent drawdown, the stock trades at 13.3× forward P/E (or $4.45 per share). This multiple tells us a lot of good news is priced in - we think there are better opportunities elsewhere. We’d suggest looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
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