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Will Ashworth

Camping World’s Unusual Options Activity Suggests It’s Ready to Go for a Drive Higher

As I write this before Thursday’s trading begins, the worst-kept secret is out: Nvidia (NVDA) blew through its Q4 2024 results, sending its shares up 14% in pre-market trading. Several analysts significantly raised its 12-month target price. The company believes it has a long runway of AI growth in fiscal 2025 and beyond. 

As usual, many NVDA options exhibited unusual activity in Wednesday's trading leading up to earnings. Interestingly, only two had Vol/OI ratios greater than 10. They were two of 99 with Vol/OI ratios greater than 10.

One of the other stocks with a Vol/OI ratio greater than 10, excluding Friday expiries, was Camping World Holdings (CWH), the RV dealer network run by Marcus Lemonis. I’ve been a fan of the company for some time. Interest rates have hurt the business in the near term. Long-term, I expect people to continue to buy motorhomes and trailers. It’s a lifestyle loved by millions.

The option with a Vol/OI ratio that was above 10 (barely) was the March 15 $23 put with 22 days to expiration. 

Here’s why I like it for those who are bullish about CWH.

The Income Play Doesn’t Hurt

As of yesterday’s close of $25.10, the put was out of the money by a couple of bucks. Were you to sell the put, the bid of $0.75 was an annualized return of nearly 55%. With 22 days to expiration, CWH stock hasn’t traded below $23 since early December, so the odds of you having to buy the 100 shares at $23 are low, providing an excellent income play. 

Since its IPO  in Oct. 2016, CWH shares have only traded under $20 on two occasions -- September to October 2023 (2 months) and October 2018 to May 2020 (19 months) -- in the 7.25 years it’s been a public company. There is no doubt that $20 is a floor for CWH shares. Since hitting a 52-week low of $16.18 at the end of October, its shares have gone on a 55% run. I expect that to continue.

Ultimately, a $20 entry level for CWH stock is an excellent long-term investment. Especially given its attractive $0.50 annual dividend rate yielding 2.0%. 

Cutting the Dividend by 80% Is Responsible Capital Allocation

CEOs use five levers to allocate capital: paying dividends, repurchasing shares, paying down debt, investing in the business, and making acquisitions. They and the board are paid to determine the best use of those five capital allocation levers. Most CEOs and boards aren’t great at it. It appears that Camping World is.

On Aug. 1, 2023, the company announced disappointing Q2 2023 results that included a two-cent miss on the bottom line analyst estimate of $0.75 and a $70 million miss on the top line consensus of $1.97 billion in revenue. 

Its shares dropped more than 13% in a single day on the news. The stock fell nearly half its value over the next three months, hitting a 52-week low on Oct. 31.

What hurt the stock was the simultaneous announcement that it cut its quarterly dividend by 80% from $0.625 to $0.125. Dividend investors promptly exited their positions on the news. 

Good, don’t let the door hit you in the butt on the way out. The last time I checked, stocks were judged by total return (dividend yield plus share price appreciation). 

Lemonis and the board explained that the cut was necessary to allocate to the more pressing need to pay for the acquisition of more RV dealerships.

“After concluding its review of the Company’s capital allocation strategy, the Board has elected to modify its quarterly dividend to reflect the prioritization of capital allocation towards RV dealership acquisitions. Since January 1, 2023, the Company has opened, acquired, or signed letters of intent with over 30 RV dealership locations,” the Aug. 1 press release stated about the dividend cut. 

320 Stores in 2028

On Feb. 21, Camping World reported its Q4 2023 results. In today's conference call with analysts, it’s expected to elaborate on its acquisition spree. We do know that it spent $210 million on RV dealership acquisitions in 2023, down slightly from $217 million in 2022. It started in 2023 with 189 RV dealerships and finished the year with 198. 

It plans to have 320 locations open by 2028. That’s adding an average of 6 locations per quarter over the next 20 quarters through 2028. At $225 million per quarter, we’re talking about a $4.5 billion outlay over the next five years. 

Based on 2023 same-store revenue of $5.23 billion and 166 same-store locations, you get an average per location of $31.5 million, which means the additional 122 stores expected to be added in the next five years will bring in an additional estimated $3.8 billion in annual revenue, about 62% of its 2023 revenue of $6.23 billion. 

Which would you rather have? $213 million in dividend payments -- 85 million shares times the old annual rate of $2.50 -- or nearly $4 billion in annual revenue and $190 million in additional cash flow?

I know which one I’d take.

Bottom Line: Marcus Lemonis and the board have wisely chosen to lean into a situation that looks to change dramatically for the better in the second half of 2024 and into 2025 as interest rates come down, locations go up, and unit sales return to previous levels.

CWH is a Buy with or without options.    

 

On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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