In early trading, the day after the company reported disappointing second-quarter earnings, Camping World Holdings, Inc. (NYSE: CWH) stock was down over 9%. The company missed on both the top and bottom lines, but the real catalyst is the company’s announcement that it slashed its quarterly dividend by 80%.
The company will now issue a dividend of 12.5 cents per share down from 62.5 cents. The forward yield is 1.6%. This will be difficult news for income investors to swallow as the company’s dividend was a key element in the overall thesis for holding CWH stock.
However, as traders sell the news, a little context could go a long way towards helping you make a long-term decision on CWH stock. Specifically, the company’s board of directors made the decision to cut the dividend because of the company’s ongoing campaign to purchase RV dealerships throughout the United States.
According to Camping World chief executive officer (CEO) Marcus Lemonis, the company has “opened, acquired, or signed letters of intent on 30 dealership locations year-to-date.” The company also says the opportunity for additional acquisitions is “unprecedented.”
There is a risk to this strategy as RV manufacturers such as Winnebago Industries, Inc. (NYSE: WGO) point to lower RV sales. However, if the company is correct in its forecast for revenue growth in 2024 and beyond, this may be a wise use of capital.
What Did Earnings Say?
The headline numbers in the earnings report showed the company generating 73 cents in earnings per share (EPS) on revenue of $1.90 billion. Both numbers were lower than analysts’ estimates for EPS of 75 cents (a miss of 3.76%) on revenue of $1.97 billion (a miss of 3.58%).
Neither miss seems to justify the 13% drop in the company’s stock. The downward momentum is likely due, in part, to the high degree of short interest in CWH stock.
However, it’s difficult to look past the earnings number which reflects a 62% drop from the $2.01 EPS it recorded in the same quarter in 2022. The company cited a pretax drop in new vehicle gross profit as a reason for the disparity. Gross profit was down 20.3% and total gross margin was down 30%.
However, the decrease in gross margin was offset, in part, by increased sales of higher-margin used RVs. This highlights the company’s strategic role as a middle-man in the RV sector.
Don’t Try to Catch a Falling Knife
A term every investor should understand is “falling knife.” This describes an event where a stock quickly drops in price. When this happens, investors should wait for the stock to bottom out before buying back in.
Down over 13% the day after earnings, Camping World stock is having a falling knife event. And investors also need to consider that CWH stock has a heavy short interest of over 17%. Combined with the stock having climbed over 31% in the three months leading into the earnings report, the momentum for the stock is bearish.
Trying to time the exact bottom is always challenging. A look at the CWH stock chart shows that it has already fallen below a level of support at $27.41. The next level to watch is $26.14. If the stock slices below that, the stock could begin to move below $22.
Investors should also consider analyst sentiment. The Camping World analyst ratings on MarketBeat show that the company received one upgrade and one downgrade in the month leading up to earnings. Value investors will want to see if analysts become more bullish on CWH stock which could be a sign the sell-off is overdone.
