Navigating Choppy Waters

I planned to do this analysis for Marine Products Corp. (MPX, Financial) as I was attracted to its strong financial position and am writing from the perspective of someone vested in this company. The business has a GF Score of 94 and strong financial strength with no debt. However, after viewing both investment propositions and product offerings of three competing companies, I am attempting to dissect the value proposition in terms of a couple of different areas: stewardship, product offerings and cash flow.

In addition to Marine Products, this analysis will also investigate business aspects of Mastercraft Boat Holdings Inc. (MCFT, Financial), Malibu Boat Inc. (MBUU, Financial) and Brunswick Corp. (BC, Financial).

Of these four companies, Brunswick is the only non-pure play competitor. The company is very diversified and has a history of acquisitions and divestitures that have at times ventured out of the marine industry. In addition to boat manufacturing, Brunswick has a strong propulsion segment that manufactures boat engines, propellers and propulsion-related controls and a parts and accessories business that manufactures marine-related components and parts.

Industry

Recreational boating is a fragmented, mature industry. An Info-Link Technologies report commissioned by Marine Products revealed that the market for all types of boats declined by a 2.3% compound annual growth rate between 2018 and 2022. An Arizton report factoring in rental boats and tourism as well as boat sales suggests the recreational boat market is expected to grow at an approximate rate of 8.69% from now until 2028. The retail boat market is cyclical with the heaviest demand in the first six months of the year.

The market experienced a boom post-Covid, when consumers who benefited from additional leisure time and stimulus income started engaging in more recreational activities. Boat sales reached a 13-year high in 2020. During this time, global supply chain issues plagued the industry. Marine Products was particularly vulnerable to these problems and struggled to keep up with dealer demand versus competitors Brunswick and Malibu Boats, both of which have strong vertical integration. Mastercraft is not vertically integrated, but the company has collaborative and enduring supplier relationships, which may have mitigated the risk of supply chain problems during this time. Interestingly, Marine Products licenses Malibu Boats Surf Wave technology for its Chaparral boats and Mastercraft uses Mercury engines in some of its outboard boat models.

Currently, the boating industry faces large headwinds due to interest rate increases that have affected both the purchase of large discretionary items for consumers and the carrying costs for boat dealers. The above boat manufacturers all engage in dealer floorplan financing with third-party financing institutions, which require them to repurchase repossessed inventory in case of dealer defaults. The impact of defaults may be mitigated in Brunswick's case as the company has its own financing companies in the U.S. and Canada in addition to those offered by third-party financing companies.

Interestingly, Malibu Boats reported during its latest earnings call that a greater percentage of retail customers are using cash for boat purchases instead of opting for financing. There also appears to be a consumer trend toward larger boat purchases.

Stewardship

Of the four companies, Marine Products appears to demonstrate superior stewardship. As previously mentioned, the company has no outstanding debt, though it has a $20 million dollar credit facility that can be accessed if needed. The company also has a healthy return on capital investment of over 44%. Marine Products has a slightly higher WACC than MasterCraft Boat Holdings, perhaps due to the previously stated supply chain struggles. Softer consumer demand has lessened MPC's supply chain issues, and the company is maintaining prudent control over its dealer network going into the softer market. Both Brunswick and Malibu Boat Holdings are rated by Morningstar as having average capital allocation strategies.

Marine Products and Brunswick pay quarterly dividends and have share buyback programs, though MPC did not buy back shares in 2021 or 2022. Mastercraft Boat Holdings also has a share buyback program. Malibu Boats has wisely elected to pay down debt instead of engaging in stock repurchases. Its debt-to-equity ratio decreased from a pre-pandemic level of 56% to 11% last year. In contrast, Brunswick's debt equity increased from 92% to 122% during the same period.

Below is a comparison of capital allocation metrics for the four companies as of Nov. 25:

Product offerings

There is a wide range of consumer power boat offerings based on sport types and user preferences.

With the little knowledge I had on boats prior to this analysis, I am limiting this discussion to the market for sport power boats, though the above manufacturers offer a wide range of boats that include fishing boats, pontoons and yachts as well. Marine Products' product offerings, which consist of the Chaparral and Robalo boat subsidiaries, are more concentrated than the other companies. Robalo is a line of fishing boats that Marine Products purchased from Brunswick in 2001.

Industry scuttlebutt of dealer blogs and discussion forums suggests that Cobalt by Malibu boats holds the dominant spot in the market and is viewed as a premium product, along with the privately held Regal brand. Mastercraft boats are also viewed as a luxury brand and a step above Chaparral. Chaparral is positioned as a mid-tier among sport boats and cruisers and competes most directly with the Sea Ray brand by Brunswick in this category. Other brands in this space include Crownline and Monterey, which are also privately held. Comparisons between Chaparral and Sea Ray boats suggest Chaparral boats exhibit superior craftsmanship, a benefit from Marine Product's niche focus versus Sea Ray, which is one of the many lines of massed produced products offered by Brunswick. Chaparral is lighter, faster and more fuel-efficient than Cobalt, which could be a factor with fluctuating fuel prices, but Cobalt has more power and is heavier, which makes for a smoother ride. These latter traits are preferred among veteran boat enthusiasts. Cobalt is also viewed as having the best durability and resale value versus the other brands. Chaparral competes with Axis, also manufactured by Malibu Boats, in the entry-level bowrider category.

Upon a preliminary review, I pick Malibu Boats in terms of consumer product appeal. In addition to Cobalt and Axis, the company manufactures Pursuit Fishing boats, which compete with Marine Products' Robalo line.

Cash flow

Cash flow analysis among the four companies is complicated by the differences in market share and breadth of offerings. Marine Products and Mastercraft Boat Holdings are smaller companies and are at a disadvantage compared to Malibu Boat Holdings and Brunswick. As Brunswick is not a pure-play boat manufacturer, it relies heavily on its propulsion business, which comprises 41.5% of company revenues as a cash source. All companies experienced negative cash flow during their latest quarters except for Brunswick.

Below is a compilation of ratios related to cash flow generation as of Nov. 25:

In terms of cash flow, I like Mastercraft Boat Holdings versus Marine Products as the company appears to generate more cash. It has a higher debt-equity ratio which may squeeze margins, but I believe it still has a fairly health ratio.

Takeaways

All these boat companies appear strong enough to withstand an industry shake-out if one occurs in 2024, but the two smaller companies appear to be stronger on the value side. Malibu Boats appear strongest in terms of building quality products. All companies have experienced softening sales due to rising interest rates and are closely monitoring their dealer inventory levels. Of the two smaller companies, Marine Products demonstrates the best capital allocation strategy while Mastercraft Boat Holdings appears to hold more promise in terms of cash flows. Intense competition and an uncertain economic environment heighten the risk level and unpredictability of all these investments so they may be better on a watch list than as an out-and-out purchase. Originally, my interest was in Marine Products, but as I have delved more into the businesses of each of these companies, Mastercraft Boat Holdings looks like it has a better combination of product, capital allocation and cash flow.