I’ve been fascinated by the changes that have occurred since the outbreak of Covid. Particularly from an investment standpoint.

As I’ve said, “it also triggered widespread changes in attitudes that could influence consumer behavior (and spending patterns) for years to come.”

One change I’ve written about before is the growing interest in outdoor activities. Think boating and RVs, for example.

The boom in RV sales is particularly interesting. Not confined to just boomers (millennials are buying them, too) — RV sales have been booming since the pandemic. They even seem to be showing some resiliency in this inflationary environment.

_{Source: CWH Investor Presentation}

In fact, one of my top picks in this space is holding up quite well — with a bright future ahead. And even better, it offers a mouth-watering yield of 9%.

My Top “Great Outdoors” Pick

I’m talking about Camping World (NYSE: CWH).

Camping World is the nation’s premier vendor of travel trailers and other recreational vehicles, sold through roughly 200 dealerships nationwide.

Regular readers may remember me talking about this pick back in August. (Although we’ve held this name in our premium High-Yield Investing portfolio since April.)

The company has been steadily expanding its retail footprint, with plans to open a dozen new dealerships from Missouri to Montana. And back in May, the company inked the largest acquisition in its history, taking control of privately-owned Richardson’s RV centers. This deal will expand CWH’s position in the California market, especially in the San Diego area.

Camping World is also branching out into the burgeoning peer-to-peer RV rental market. The new platform will enable first-time users to experience the RV lifestyle for a weekend, perhaps turning renters into eager new buyers.

And amid the threat of a recession, CWH is also pivoting to focus on growing its pre-owned segment. Those efforts are clearly bearing fruit, resulting in the sale of nearly 41,000 pre-owned vehicles year-to-date. That’s a solid increase of 7%, despite rising borrowing costs. Gross profits on those sales totaled $369 million, so the company is pocketing an average profit of $9,000 per used vehicle ($369m/41,000).

Inside The Numbers

Camping World just reported $1.9 billion in third-quarter revenues. That’s a modest decline of $60 million (3.2%) from last year’s period. But that drop is mostly due to the company’s decision to exit several product categories (like fishing gear and outdoor apparel).

Core demand for campers and RVs is alive and well. The company sold more than 32,000 vehicles during the quarter, solidifying its top market share position. While new sales trailed off just a bit, pre-owned sales volume hit a record high of 14,460. Used campers tend to carry higher margins, 24% versus 19% for new products.

Unfortunately, gross profits on new vehicles have been trending lower, sliding to $9,500 from $11,000 last year. That’s not due to weaker sales prices (the average ticket has increased 10% from $41,000 to $45,000). But manufacturing costs have risen twice as much, biting deeply into the bottom line.

On the plus side, controllable expenses, such as selling, general and administrative (SG&A), have been kept in check. In fact, they actually declined last quarter. Still, inflationary cost pressures dropped earnings to $0.98 per share from $1.75 a year ago.

But that still provides a comfortable dividend coverage ratio of 156% on the $0.625 quarterly dividend. And keep in mind that reported earnings are heavily impacted by non-cash depreciation charges. Add those back, and there is an even larger cash flow cushion.

Looking Ahead

Given the rising costs of new RV production, management’s pivot towards pre-owned vehicles is shrewd. I appreciate CWH’s efforts to tighten operating overhead and the decision to expand its retail footprint via acquisition.

I’m monitoring the sharp increase in inventory across CWH dealerships nationwide, as this can sometimes be an early warning sign. But in this case, it appears to be normal re-stocking from depleted levels last year.

CWH continues to cater to the growing interest in the great outdoors and the newfound popularity of the RV lifestyle. In fact, it’s one of my top picks for this trend.

The company continues to move more than 2,500 campers and RVs per week. And as I’ve discussed before, the income stream doesn’t end when these vehicles leave the lot. The company hauls in hundreds of millions in recurring finance charges, insurance premiums, and maintenance fees each quarter.

CWH trades at just six times earnings (seven times forward earnings). And it offers a mouth-watering yield of more than 8%. We’re up double-digits on the stock (while the S&P 500 has lost 10% during that period). Despite the headwinds outside the company, it remains a “buy” for risk-tolerant investors who want solid upside while locking in a high yield.

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