MCBC Holdings Inc.: Calm Waters Ahead

Summary

• I think investors would do well owning shares of MCBC Holdings Inc., given the various growth drivers in the recreational boating industry.
• The acquisition of NauticStar seems to be going better than expected.
• I offer a reasonable option strategy to mitigate the low risk here.
• The stock is inexpensive, and has excellent insider and institutional support.

Over the past twelve months the shares of MCBC Holdings Inc. (NASDAQ:MCFT) are up about 35%. I think there’s still value here, and so I’ll go through my reasoning for buying by looking at the financial history, and by reviewing the stock itself. I’ll make an appeal to authority, and I’ll suggest a slightly safer way for an investor to invest in this name. Since there is no dividend, the opportunity cost of shares versus options is zero. For that reason, I’m going to recommend that investors who are comfortable doing so participate in any upside by selling put options on this stock.

Founded in 1968 and headquartered in Vonore, Tennessee, MCBC Holdings Inc. is the parent of iconic MasterCraft Boat Company, manufacturer of premium performance sport boats. In October of 2017, the company acquired NauticStar Boats LLC for $80.5 million. NauticStar is a manufacturer of 18-28 foot boats that diversify MCBC’s product family a great deal (for example, they provide MasterCraft with a presence in saltwater fishing). At the time of acquisition, NauticStar sold its boats in the United States through a network of 70 dealers. Since then, 18 dealers have been added, and NauticStar production has increased by one boat per day. In my view, MasterCraft will continue to benefit from the various growth drivers we see in the recreational boating industry.

Financial Snapshot

A quick review of the financial history here indicates that this is a growth company that seems to benefit from scale economies. Specifically, over the past five years, revenue has grown at a CAGR of about 7%, while gross profit is up at a CAGR of 15.6%. Earnings per share has grown at a CAGR of about 33%, in spite of the fact that the share count has grown at a CAGR of about 10.8%.

Given the comparison of the first nine months of FY 2018 relative to the same period a year ago, the growth theme seems to be intact. In my view, this is driven by a combination of the NauticStar acquisition, and the fact that business is brisk. Specifically, the top line was 39% higher in the first nine months relative to the same time a year ago, and net income basically doubled. All of this suggests to me a certain scalability of the business. The company seems to be able to throw an even larger portion of revenue directly to the bottom line.

Nothing is perfect, though, and MCBC is no exception. I’m not a fan of the dilution shareholders have seen, and total debt has grown at a CAGR of about 1.3% since 2013. Fully 88% of this is due in 2021, and the cost (6.5%) is on the high side in my view. That said, the interest expense has actually declined as the debt has grown, demonstrating that the company’s cost of capital has obviously fallen. I don’t think there’s risk of credit or solvency crisis here anytime soon, but would like the company to start buying back shares, especially at these levels.

Source: Company Filings

The Stock

In my view, successful investing is about more than finding a profitable company that’s got some good growth drivers associated with it. If an investor pays the wrong price for that growth, a great company can turn into a terrible investment. With that in mind, I need to spend some time talking about the stock itself. When I judge whether or not a stock

Source: Gurufocus

Appeal To Authority

I’ve said it before, and I’ll say it again. Not all investors are created equal. Some are more adept at this activity than others because of a host of factors ranging from disposition to occupation. With that in mind I think it’s a good idea for investors to at least be aware when a relatively talented institutional investor makes a move. This past December, Hotchkis & Wiley purchased just over 74,000 MCBC shares. Although they’ve reduced their shares owned slightly since then, the fact that the company owns just over 72,000 shares as of the latest filing date fills me with some confidence.

I should also point out that this company has fairly high institutional support, and relatively steady insider ownership, as per the following;

Source: Gurufocus

Risks To The Thesis

Fully $37 million of the $80.5 million paid for NauticStar was goodwill. According to some academic research, goodwill write downs are “prevalent and large”. For that reason, I’m always somewhat nervous about a company with goodwill created by acquisitions. The fact that goodwill tends to be troublesome hangs like a financial sword of damocles over this company and any other that paid more for an acquisition than it is arguably worth. It’s a risk in my view because fully 35% of the capital structure is now composed of goodwill.

That said, not all dogs are rabid. Just because there’s goodwill here doesn’t mean that it’ll be written down in this case. This is especially so given that the acquisition seems to be going apace. As stated above, in calendar 2018 18 NauticStar dealers have been added, and the company anticipates adding 30 new dealers by the end of 2018. This network expansion, along with some operational improvements is reflected in the financials, with NauticStar sales up 42% to $24.6 million during the most recent quarter. Thus, I’ll be watchful of any deterioration in the NauticStar business, but for the moment, I think the risk of a writedown suddenly hitting earnings is remote.

Options to Reduce Risk

The bid-ask spread on the January calls with a strike price of $25 is too great at the moment in my view ($1.10 to $3.40). Thus, I a better bet would be to sell puts on the name. The puts with a strike price of $25 are currently being bid at $1.30. Thus, an investor who sells these puts is taking on an obligation to buy the shares at a net price of $23.70 ($25-$1.30) between now and the third Friday of January. This strategy is beneficial in a couple of ways. Worse case scenario, the shares drop, and the seller of the put is forced to buy the shares at a price 3% below the current price. While unfortunate, this is by definition less risky than paying 100 cents on the dollar. If the shares continue to rise in price, an investor will simply pocket the premium as “free money.”

Conclusion

Whether investors access this name via short puts or via stock ownership, I think they will do participating in the growth of this business over the coming years. This is an enormously profitable business that has exposure to enormous growth drivers, and they seem to be executing above plan on their NauticStar acquisition. I wish the company would start to buyback shares, but in my view, the shares are inexpensive enough to make risks tolerable. Finally, my level of comfort is increased a great deal by the fact that the stock seems to have some new institutional support. Price and value inevitably meet, and I think investors would do well to buy at these levels before price rises to match value.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in MCFT over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.