MasterCraft Boat: A Smooth-Sailing Journey To Rebound And Sustainability

Summary

  • MasterCraft Boat Holdings, Inc. continues to show a fruitful fiscal year, given its robust core operations.
  • The inflationary pressures, particularly oil and gas, may still affect its performance.
  • The pent-up demand for outdoor activities in the Spring and Summer may help sustain its rebound.
  • The stock price has been in a continued downtrend with potential undervaluation.

Speedboat racing along the open sea

mbbirdy/E+ via Getty Images

MasterCraft Boat Holdings, Inc. (NASDAQ:MCFT) did not avert the scourge of the pandemic. But, it was able to weather the stormy market environment and regain its footing. It showed more promise as health and safety restrictions eased. Today, it remains a durable figure in the recreational boating industry. Revenue and income growth are evident, which may intensify as Spring and Summer come.

Meanwhile, the stock price is in a downtrend, showing its undervaluation. Also, inflation may continue to influence its stock performance. But, the boom in outdoor recreation may help the company keep up with the trend this fiscal year. Thanks to the pent-up demand, which matches its strategic increase in production. Growth prospects are still promising, which may cushion the impact of inflationary pressures.

Company Performance

MasterCraft Boat Holdings, Inc. did not have a fruitful 2020 as the pandemic disrupted its supply chain. Its limited operating capacity lowered the production and the operating revenue by 23%. Margin contraction was also evident, although it remained above 20%. If we focused on the core operations, the company would still be profitable. It was able to keep its costs and expenses low amidst market disruptions.

The efficient asset management of the company helped it rebound in 2021. It coincided with the easing of restrictions and the pent-up demand for outdoor recreation. The US boating industry saw a rebound in sales, 7% higher than the five-year average. The recreational boating market had the highest growth rate. Thanks to the influx of customers into outdoor recreation. Powerboats sold exceeded 300,000 units, the second time it happened in fifteen years. MasterCraft Boat also showed swift recovery. Revenues amounted to $525 million, 37% higher than the five-year average of $384 million. Its operating margin expanded to 14%, enhancing efficiency amidst a larger operating capacity.

MasterCraft Boat Operating Revenue

Operating Revenue (MarketWatch)

MasterCraft Boat Operating Margin

Operating Margin (MarketWatch)

Today, it observes better results as the pandemic fear subsides. The easing of restrictions and reopening of borders make outdoor recreation a staple. The trend is timely as Spring and Summer entice more recreational boating customers. Its accumulated operating revenue is already $303 million, a 36% year-over-year growth. Indeed, it continues to sustain its growth amidst market changes. It attracts more demand and caters to more customers as its production capacity grew by 14.6% in 2Q 2022.

Meanwhile, inflationary pressures have an impact on production. The rise in the price of oil and gas has a domino effect on its demand. Also, supply chain problems persist, so the delivery of products becomes more expensive. Nevertheless, it shows sustained profitability with a net income of $15.4 million, a 17% yearly growth. It makes 2Q 2022 the most profitable second quarter in history.

Despite the challenges, more growth prospects must be expected. There is a massive uptrend in travel and leisure. Travel spending this year is already near pre-pandemic levels. So, there is a continued recovery in outdoor activities, including recreational boating. The larger operating capacity and revenues show there are still more to look forward to. Once the supply chain problems are settled, it will have smoother core operations.

Also, MasterCraft Boat continues to innovate for a better experience and fuel economy. With its newly released towboat engine, every customer may have a smoother and more responsive boat ride. This strategic move matches the rise in outdoor activities this Spring and Summer. Its increased wholesale visibility may also enable it to capture more demand. This combination will help the company cushion the blow of inflation.

The company expects a 25% revenue growth this fiscal year. It is in line with the average growth in the first half, making the outlook realistic. Meanwhile, my projection is at 17-20%. I believe that growth may remain substantial. But, inflation may still be challenging during the second half of FY 2022. I project that the operating revenue will increase to $614-630 million this fiscal year. In FY 2023-2026, it may reach $706-911 million.

MasterCraft Boat Operating Revenue

Operating Revenue (Company Guidance and Author Estimation)

MasterCraft Boat Operating Revenue

Operating Revenue (Author Estimation)

What Helps MasterCraft Achieve The Goals

The boating industry faces many inflationary pressures. MasterCraft is not an exception. But, the pent-up demand for outdoor recreation this Spring and Summer may be helpful. Also, its larger operating capacity allows it to increase its market visibility.

It becomes more capable of ramping up its production and generating more revenues. It proves fruitful as it outpaces its primary peers by 80-300 basis points. So, it remains the top ski-wake manufacturer. It is no wonder that it continues to capture a larger portion of the market share. Compared to its primary competitors, it shows the largest market share increase. Even better, profitability remains high, showing its efficient asset management amidst the expansion.

Market Share

Market Share (Second Quarter Earnings Conference Call)

With its larger capacity and higher revenues, it has more means to innovate its products. Its new towboat engine provides customers with a better boat experience. Fuel economy and more responsive boat rides make the price reasonable. Also, it redesigned XT2022 with more powerful performance and customization. Towboats with 150 KW power are also another impressive boat feature. So as the market sees more boaters, MasterCraft evolves to get ahead of the competition. The increased market presence matched with continued innovation makes its optimistic outlook attainable.

Moreover, MasterCraft Boat fortifies its market positioning with its solid and intact fundamentals. Cash inflows and borrowings remained stable as it increased its operating capacity. Cash decreased in line with the substantial increase in inventories. But it also made loan reductions and share repurchases of $9.9 million. So as the company raised its production level by 14.6%, it also reduced its financial leverage.

It can be confirmed in its Cash Flow Statement using the value of the operating cash flow and Free Cash Flow (FCF). In 1Q 2022, there is a substantial increase in current assets. It was most evident in inventories with 43%. It can be seen in the changes in working capital as they led to more cash outflows. The increase appears to be a wise decision as FCF in 2Q 2022 almost quadrupled to $23 million. The high cash flow can verify that the quarter is the most profitable in history.

While the accumulated value of FCF is slightly lower at $5.5 million, 3Q and 4Q may offset the decrease. It is in line with the increased revenues and income of the company. Today, it keeps its production level. So, the working capital and CapEx will remain similar to the value in the first half. With that, I project FCF-to-Sales Ratio to stay within 7-8%. So FCF may reach $51-74 million for the next five years.

MasterCraft Boat Free Cash Flow

Free Cash Flow (Author Estimation)

Price Estimation

The stock price of MCFT has been moving sideways in the last year. After its dip to $22.49 last April 7, it is slightly uptrend today. The inflationary pressures and supply chain problems have affected the recent price movements. At $24.54 today, it does not promise a sustained increase yet. And if we check the pre-pandemic trend, it has already rebounded. But, it still appears cheap, given its PE Ratio of 7.79. It is lower than its competitor, Malibu Boats, Inc. (MBUU), with 8.48. Likewise, its PE Ratio of 0.74 shows it is also a desirable stock and lower than MBUU with 0.98. To verify the potential undervaluation, I used the DCF model using the FCFF method.

FCFF

38,000,000

Cash and Equivalents

12,000,000

Outstanding Borrowings

32,000,000

Perpetuity Growth Rate

4.00

WACC

8.80

Common Shares Outstanding

18,800,000

Stock Price

$24.54

Derived Value

$43.80

Given this, the stock price is still undervalued by 44%. It seems to correspond to the slight upside for the last two weeks. The price may increase for the next twelve months. Also, it adheres to the optimistic view, as shown by the PE and PS Ratio. But, external factors like supply chain and inflation must still be considered.

Bottomline

MasterCraft Boat Holdings, Inc. continues to take the lead in the recreational boating industry. Its financial performance remains consistent with enticing growth prospects. The strategic market positioning and its stable fundamentals make it a strong contender. Despite the supply chain challenges and inflation, it remains viable and sustainable. Meanwhile, the stock price continues to move sideways with no promise of an upside soon. But given the potential undervaluation and market opportunities, it is still cheap. The recommendation is that MCFT is still a buy.

This article was written by

Full-time equity analyst/Part-time Investor. Having adequate knowledge and reliable information can help in your investment decisions. Stock market success is possible as long as one is willing to study, risk, and learn.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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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