MarineMax: Don't Expect Outstanding Returns From The Stock
Summary
- Recreational boat industry enjoys short-term tailwinds.
- Consumer sentiment is rising which might bring new opportunities for boat & yacht industry.
- MarineMax stock looks fairly valued at $49 level.
Recreational Boat industry grew at a double digit rate in 2020 as COVID 19 urged people to avoid indoor activities. The trends look quite beneficial, however, we don't expect them to last long. MarineMax (NYSE:HZO) is one of dominant players in the industry which benefited largely from the trend. The stock of the company is fairly valued; thus, we don't expect the stock to outperform the market.
MarineMax is a consumer discretionary player as it is selling boats and yachts which have an average price of $215,000. The price is almost 4 times higher than average boat price of $57,000. This is a clear indication that the business is concentrated on luxury product segment. These kinds of markets are highly correlated with economic situation and with consumer sentiments. Huge QE programs and Stimulus Packages will definitely improve economic situation and eliminate all pandemic consequences.
Consumer sentiment declined considerably due to COVID 19, currently the index value is 84, about 15% lower than pre-pandemic levels. Thus we see here that the luxury goods industry has room to increase its sales.
Source: Trading Economics
Due to the pandemic lifestyle has changed substantially. People avoid indoor activities and increase their spending on outdoor activities. For this reason in 2020 new boat sales increased 12% YoY to 310,000 new units, which is the highest sales number since the Great Recession. In the USA the boating activity is quite popular as about 100 million people go boating each year. 61% of these people have annual income of less than $75,000. So these numbers indicate that there is a huge interest in the industry, however, the majority of the interested people don't have too much income to acquire boats and yachts. However, coronavirus effect is probably short-term, as the majority of population returns to their traditional lifestyles and we cannot expect the same growth rate for long-term horizon.
Recreational boat industry grew at 5.4% CAGR rate during 1992-2019 period. In 1992, total sales of the industry were $10.3 billion, while in 2019 the industry recorded $43.1 billion sales. The industry mainly consists of small private companies which are trading boats and yachts. This environment is quite beneficial for MarineMax as the company receives opportunity to expand its operations by new acquisitions. The company is actively making new acquisition as inlast 2-year period it acquired 6 companies.
Source: MarineMax Presentation
The company has recorded 9.97% return on total capital in 2020, which is higher than its 5-year ROIC margin of 6.4%. We can assume that the management will look for new acquisitions which bring higher ROIC as the company has a strong balance sheet with Debt to Equity ratio of only 67%.
At the same time, we need to admit that the company's ROIC is less than required rate of return of 10.1%, which we calculate in Valuation sector. This is a negative indicator meaning that the management brings less return than stakeholders require.
Valuation
We assume that the company will be able to record cash flow growth rate in line with industry growth. In the last 27 years period, the recreational boat industry grew at 5.4% CAGR, thus we will adopt that rate for our DCF Model. As a perpetual growth rate, we adopt 2% rate. 1.78 beta coefficient, 1.7% risk-free rate and 4.72% equity risk premium inputs yield 10.1% required rate of return. We have taken $94 million 2020 free cash flow as a starting point for our model. So our model indicates intrinsic value of $49, which means that the stock is fairly valued at current market prices.
Source: Author's Spreadsheet
Historic multiples also indicate that the stock is fairly valued as it is trading near its 5-year median multiples. Current P/S multiple is higher than 5-year median by 50%, however, it might be the result of strong operating margin growth in 2020.
On the other hand, another model indicates that the stock is overvalued. When we analyze relationship between MarineMax Market Cap and Revenue in recent 10-year period, our model yields $36 stock value. However, the model doesn't incorporate the fact that the company expands its margins and recorded 370 point gross margin improvement in FY 2020.
Source: Author's Spreadsheet
Threats
The company operates in a consumer discretionary sector and mainly sells products for luxury segment. It means that the company is extremely sensitive to economic downturns. In 2008, during the Great Recession the company lost 55% of its revenues. During the same period consumer sentiment index deteriorated falling from 100 to 58 level, which is also strengthening our assumption that there is a significant correlation between the consumers' sentiment and the industry.
Source: Trading Economics
Conclusion
MarineMax operates in an industry where macrotrends brought great tailwinds in 2020. However, in the long run, we don't expect outstanding growth to continue, thus we think that the business will grow parallelly with its industry by 5%-6% annually. The management returns a part of FCF to investors as annual average share buyback rate is 2%. The stock is fairly valued which, means that investors could expect high single digit return per year, which will not outperform the S&P 500, thus we assign Neutral rating to the stock.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.
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Comments (4)
They base the price on expected 3 year returns, divie, book value,
And adjust for the 10-yr bond and inflation.My bias is much more positive. If they make most of their money
off expensive boats, from big spenders, I would see the business
as more insulated from the coming downturn, which will hit the
low end of the market harder. It may offer more roll up opportunities
as well.
,