The odd thing about investing is that it is often a counter-intuitive pursuit. You may realize that a certain company has favorable prospects moving forward, but if the market has already priced these expectations into the price of a security, are you really getting a good value? Oftentimes, the answer is “no.” Buying into a company with horrifying bleak near-term prospects might seem suicidal but if the price is right, then why not?
Over the past few months, I have written extensively about seeking out bargains amongst Real Estate Investment Trusts (REITs). I have found quality companies that I believe can be had at huge discounts such as Brandywine (NYSE:BDN), Lexington (NYSE:LXP), and Winthrop (NYSE:FUR). I have also found REITs that appeared to be priced well under liquidation value such as Colonial (NYSE:CLP) under $4. These bargains have become available because of widespread fears about commercial real estate. Yet, these stocks are often priced with massive cushions built in so that even with massive declines in property values and high vacancy rates, you’d still be getting a deal.
Today, I shift gears into another sector that most investors are terrified to touch: boating. While you might believe the near-term prospects are very dismal, under $3.50, I would argue that boat and yacht dealer, MarineMax, is priced near its liquidation value and offers a substantial cushion to prudent long-term investors who are looking for deep value.
Marine Max is the largest recreational boat dealer in the United States selling both new and used high-end boats. They also provide a handful of other boating-related services including repairs, boat and yacht brokerage services, and storage. They have 77 locations across the country, with a heavy concentration in Florida.
While the history of its legacy operations reaches back 40 years, MarineMax itself was formed in 1998 after the acquisition of five independent boat dealers. It conducted an IPO later that year and has traded on the New York Stock Exchange ever since. The company has quadrupled in size since its inception.
For FY 08, loss per share was quoted at $7.80 per share. Once again, that included one-time items, including a massive goodwill impairment charge of $122 million. Once you discount that, HZO had a less eye-bleeding loss of 66 cents per share. If you further discount depreciation and amortization, that figure becomes 5 cents per share.
Even while earnings figures make things look slightly worse than they are in reality, there is no escaping the fact that the environment for MarineMax is poor at the moment. Same-store sales declined 46% for the 2nd quarter of 2009 when compared to the prior year. The overall revenue picture is virtually identical as revenues declined from $233.3 million to $129.6 million year-over-year for the most recent quarter.
Even beyond the numbers, can you think of any industry you would prefer to be in less than selling high-end boats and yachts during one of the worst recessionary environments of the past century? The poor outlook is enough to send shivers down one’s spine. All the same, there are very good reasons why MarineMax might not be such a terrible buy right now.
There is some evidence that things are improving. The Bristol (TN) Herald Courier reports that many local boat dealerships started to turn the corner in April due to rising lake levels and generous manufacturer discounts. While it's true that MarineMax does not operate in the particular market mentioned in the article, the manufacturer discounts is probably a more universal trend.
Marine Max’s balance sheet does not look too bad, either, and even assuming some more huge losses and more inventory write-downs, it looks like there might be some value hidden beneath the surface here. With a 61.6% liability/value ratio, MarineMax would not appear to be in completely terrible shape. Current ratio of 1.28 is not too bad. Quick ratio is much more frightening at 0.16.
Inventories make up nearly 71% of MarineMax’s total assets (TA), which is the major reason for the huge discrepancy between the current ratio and quick ratio:
This means that the value of MarineMax is heavily dependent on the value of their inventories. Given the current environment, we can probably assume that people are not rushing in to buy boats and yachts at premium prices. Therefore, inventories deserve a write-down.
If we were to take inventories at face value, HZO’s net tangible assets (NTA) would be equal to $13.37 per share. Here’s a table laying out the adjusted NTA per share considering various write-downs.
Note that the last column shows NTA per share if MarineMax were to dilute their stock with a secondary offering --- increasing the total number of shares to 22 million.
This chart tells me that HZO could sell off their boats and yachts at steep discounts and still be worth more than the market thinks it is right now.
Earnings and Cash Flow Measurements
In order to get a sense of historical earnings and cash flows for MarineMax, I created two charts. These charts are stated in per share terms, but on a constant basis. I also factored in further dilution for these figures, so instead of 17.5 million shares outstanding, I used 19 million shares. Here are the results:
Here are the averages for the above chart:
Here’s a quick guide to the abbreviations:
- DEPS = Diluted Earnings Per Share
- CFOs = Cash Flows from Operations
- FCFs = Free Cash Flows
- NI + DA = Net Income plus Depreciation & Amortization
- INCR in SE = Increase in Stockholders’ Equity
The “INCR in SE” figures are pretty meaningless for HZO due to a lot of dilution. NI+DA and DEPS are the best measures for profitability in my view for HZO.
The Cost/Revenue Picture
Here are a couple more charts that give HZO’s margins for the past three years (1st chart) and for the past two quarters (2nd chart):
With all that info, I try to make a valuation for MarineMax. It is a difficult task, however, because it’s almost impossible to realistically ascertain their average profitability/free cash flows moving forwards. I devised 12 scenarios in order to give myself a sense of all the possibilities.
The first eight scenarios are “steady state scenarios” in which I provide a Year 1 Added Value ("Y1 - Funds") figure, assume a 3% growth rate, and simply come up with a valuation that way. This might sound unrealistic, but keep in mind that earnings figures for HZO factor in inventories purchased at prices that are likely higher than the current market prices. I already factored in inventory impairment into the adjusted NTA picture, so the cash flows are likely positive moving forward based on my method of valuation.
The last four scenarios are a bit different. Scenario #9 and #10 are more complex and assume some dreadfully awful results for HZO in the next 3-4 years before reaching a steady state. For #9, the steady state is $0.60 per share. For #10, the steady state is $0.30 per share.
Scenarios #11 and #12 are more forgiving. I believe #9 and #10 are unrealistic (since I would in all likelihood be “double-counting... inventory write-downs), but I used them to gauge how bad things could be. Scenarios #11 and #12 assume that HZO recoups $0.50 per share in Y1. After that, #11 reaches a steady state at $0.40 and #12 reaches a steady state at $0.20.
Complicated, eh? Here are the results:
As always, I'd advise readers not to take these valuation dogmatically. This is more or less a table of possibilities.
Overall, MarineMax looks fairly cheap to me right now. It’s not quite the “liquidation event of a lifetime” at $3.50, but I think it is an interesting buy at the moment. I have added a small 0.7% position in MarineMax to my KaChing $10 million simulated portfolio. If the price were to dip below $3, I might up the ante. To some extent, this is an experimental pick for me, simply to test out asset valuation methods, but I do think it is worth more than $3.50.
My probable valuation for HZO is $8.00. I believe Scenarios #5 and #11 are the most realistic assessments of MarineMax’s situation. My downside probable valuation is $5.75 --- this is closest to Scenario #3. My upside probable valuation is $10.25 --- this is closest to Scenarios #6 and #11.
Downside risk is $0. This is based on the possibility that HZO continues to operate in a highly unprofitable manner for the next few years before going bankrupt. I believe the odds of this are about 5%, as I believe that management will cut costs and eventually, reach some slightly profitable state. Upside potential is $18. This is based on Scenario #8, plus a slightly more optimistic future.
MarineMax is an interesting buy for long-term investors. I believe risk-reward favors the long side enough so that it can be a worthwhile buy. This is high-risk, so I wouldn't advise jumping in unless you can stomach 30% - 60% losses in the short-run. I have not added it to my real portfolio, but I might consider it if it dips below $3 again.
Disclosure: No position in HZO