On Feb. 5, recreational boating company MarineMax (NYSE:HZO) came out with its Q1 FY2015 Form 10-Q which follows up in more detail on its earnings announcement released on Jan. 29. In the most recent quarter, the company experienced a robust expansion in its fundamentals and beat Wall Street expectations. However, over the long term, investors should heed caution. Let's take a look to see what's going on with MarineMax.
Demand drives revenue and net income
In the most recent quarter, MarineMax saw its revenue increase a whopping 44% year over year. The company reported net income of $214 thousand in the most recent quarter, which was proudly touted by management, considering it was the off-season. This compares favorably to a net loss of $3.4 million the same time last year.
There were some wolves in sheep's clothing in the most recent quarter. Improving economic conditions served as a catalyst for increased demand. Same-store sales saw a whopping 45% increase year over year. However, demand came at a cost - company management noted a stark increase in the sales of its larger boats which carry lower profit margins. MarineMax saw its gross margin go to 23.7% in the most recent quarter vs. 27.3% the same time last year. Nevertheless, increased demand put the company in the black, which isn't typical for its first quarter.
Free cash flow deficit expanded
While MarineMax's revenue and net income had exceptional comparisons, things were more normalized for its cash flow. In the most recent quarter, the company saw its free cash flow deficit expand 236% year over year. MarineMax is building up its inventory due to higher anticipated demand. Moreover, the company expanded its capital expenditures 26% year over year. Hopefully, the company can clear out its inventory during the year.
Balance sheet is not as good as you think
MarineMax's balance sheet harbors the meanest wolf in sheep's clothing. The company had $17.8 million in cash at the end of the most recent quarter which equated to 7% of stockholders' equity. I like to see companies harboring cash that equates to 20% or more of stockholders' equity.
MarineMax possesses little long-term debt. However, the company possessed $157.2 million in short-term debt which equated to a whopping 65% of stockholders' equity, resulting in interest expense of $1.1 million. As a result, its operating income only exceeded interest expense by a scary 1.2 times in the most recent quarter. The rule of thumb for safety lies at five times or more. In 2014, MarineMax's operating income exceeded interest expense by only 3.8 times vs. 4.5 times in 2013, according to Morningstar. This gives an indication that interest coverage is more than a seasonal issue.
MarineMax is expecting a recovering economy to boost demand for its products. However, the company is trading at a P/E ratio of 46 vs. 18 for the S&P 500 according to Morningstar. This makes the company highly overvalued. Moreover, I would like to see the company work toward some margin of safety in terms of interest expense coverage. Investors may want to take their investing dollars elsewhere.