MarineMax: It's Been Choppy Seas; Clear Sailing Ahead?

Aug.22.14 | About: MarineMax Inc. (HZO)

Summary

The largest boat dealer in the US.

Targets upscale buyers with $148,000 avg. price tag.

22% same store sales increase may foretell bigger things to come.

Nine years ago, I took a look at MarineMax (NYSE:HZO), a dealer in sport boats and yachts and related financial services, as a potential small-cap value stock. At the time, it was a $31 stock, trading at about 17 times earnings and with a projected earnings growth rate of 15%.

On the surface, it looked attractive, but because it didn't meet all my criteria (too much debt, narrow margins, and not enough insider ownership), I took a pass on it. However, I always return to stocks I once examined for another look.

HZO is the largest recreational boat dealer in the country, with 54 locations across 18 states. The company was pulled together via acquisition of 28 companies to form MarineMax. The company had as many as 88 locations, but the financial crisis crippled the operation. The company had four years of straight losses, from 2008 to 2011, before recovering in 2012.

The company sells both new (80%) and used (20%) boats, focusing on upscale brands, including the famous Brunswick line. Their average boat sells for $148,000, which is four times the industry average. There is also the high-margin elements such as maintenance, repair, storage, and accessories.

The boating industry has never quite recovered from the financial crisis. In 2006, the industry had almost $40 billion in sales. Today, it's still down around $35.6 billion.

However, things are on the mend. Same-store sales were up 11% in FY12 and FY13. In the quarter just reported, HZO stock reported a 22% increase in revenue and same store sales exploded, up 22%. Income before taxes increased 100% YOY to $11.5 million, with diluted EPS of $0.47 improving over last year's $0.27.

The company sits on $41.8 million in cash and has no long-term debt. HZO is not a cash flow monster. It's only generated $11 million in free cash flow in the TTM.

HZO is still a small-cap stock, with market capitalization of $432 million. It sells, as of the latest close, at $18, where it trades at 31.7 times earnings, and pays no dividends.

Interestingly, the consensus of the four analysts who follow it is that earnings will grow by 20% over the next five years. Three analysts rate it a "Strong Buy."

Should you cast your net? Let's look a little deeper.

First, take note that the price is 40% below where it was nine years ago, and that's without the benefit of a split. The price chart reveals that in June 2005, the stock was gyrating in a range between $25 and $35. Then starting in 2006, along with the rest of the market, MarineMax pulled a Titanic, sinking to $1.19 by March 2009.

So, if you had followed my lead, you would have spared yourself a death-defying 96% capital loss - unless you doggedly held onto it, in which case you'd have lost "only" 43%. On the other hand, if you'd had the wisdom, guts or blind luck to plunk $1,000 in it at the bottom, your shares would be worth $14,857.

HZO went public in June 1998 at a price of $12.50. It's now almost exactly at the mid-point of its lifetime range, and it's tempting to think that it could get back to its previous all-time high of exactly $35.00, which it reached in April 2005.

What's clear from its history is that sport boats and yachts are playthings of the well-to-do. In terms of its household wealth, that economic stratum was hit hard by the financial crisis, which slammed real estate prices before stock prices, and luxuries like boats were among the items some in that strata were forced to forgo.

But since then, prices in both markets have recovered. So, by all accounts, the yacht and sport boat markets have also lifted by the same tide.

So, avoiding another crisis, and given that the Baby Boomers are in the first stage of their retirement wave, one would think HZO is well-positioned demographically for the kind of growth the handful of analysts who watch it project it will enjoy.

But they aren't.

Sure, it appears that business is picking up again. Yet the upscale consumer seems to be spending more money at the luxury retailers than they are in the boating arena. That the industry is still 11% smaller than it was eight years ago doesn't bode well for the sector.

HZO stock just doesn't fit the bill as a small-cap value stock that has room to explode into a multi-bagger. It's just not growing as it needs to, although I can't rule out the possibility that things pick up in the future.

Strictly on a fundamental basis, HZO still doesn't meet some of my key criteria. Its net profit margin is a scant 1.86%, where my small cap value stock picks usually enjoy a margin of at least 7%. Its insider ownership has dropped from 8.4% to just 2.65%, a number I want to see at least at 20%. That insiders have been bailing out is not a good sign. I like that it has no long term debt, but I need to see significant free cash flow.

Finally, I think at its current price, HZO is overvalued. Its PEG ratio - P/E to Growth Rate - is 1.56. Ideally, you want the PEG to be 1.0, a level where you're not paying more than you should for the same growth prospects.

I think HZO stock is overvalued for its present situation, and the price has baked in a fair amount of optimism going forward. If things continue to improve, there may be reason to consider jumping into the water, but for now, I suggest you stay away.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.