Malibu Boats, Inc. (NYSE: MBUU)
One-page pitch on a high-quality cyclical. (October purchase at $40.13 cost base).
Price: $42.15 USD | Diluted Market Cap: $844m | Free Float 95% | Daily Value Traded: $9.5m
Malibu Boats, Inc. (“MBUU”) is a boat manufacturer headquartered in Loudon, Tennessee. At 48% of sales, the largest (and most attractive) of its three segments is the ‘Malibu’ segment, which has #1 share of the US wakeboat market. The wakeboat niche is a fertile ground for investment opportunities, combining attractive profitability with extreme cyclicality. As the market leader, MBUU has several high-quality traits, including 21% and 30% through-cycle total and tangible ROIC respectively; stable and rising market share estimated at 29%; and a history of long-tenure management. Robust returns are enabled by a capital-light business model that works closely with a distribution network of dealers. These dealers—over 50% of which have partnered with MBUU for 10+ years—use floor plan financing to take ownership of boats as they are produced. Therefore, the bulk of inventory volatility is taken off MBUU’s balance sheet, with net working capital only around 3% of sales.
Situation Overview
MBUU traded as low as -43% YTD after a trifecta of negative news: (i) 15-year CEO Jack Springer resigned abruptly in February, compounding the departure of 13-year CFO Wayne Wilson last year; (ii) the company’s 2nd largest dealer, Tommy’s Boat’s, went into liquidation and subsequently filed a lawsuit against MBUU, alleging channel-stuffing; and (iii) demand destruction led to a 75% annual drop in unit volumes in the wakeboat division in Q4. This has caused the usual 10% EV/Sales valuation premium MBUU has versus closest peer MSFT to reverse into a discount (each have near identical margin profiles). I believe these issues are temporary in nature and that the worst period has likely passed—historically, a lucrative time to buy shares. (E.g., peer MPX returned 20% p.a. in the five years following 2011). What’s more, the company enters this down cycle with an unlevered balance sheet while buying back stock, set at $10m per quarter, or 5% of shares annually at current prices. From Q1 FY23, management began to pay down the $120m revolver and term loan to zero with near perfect timing; wakeboat declines emerged only two quarters later.
#1: History Suggests the Cycle is at the Cyclical Bottom
The last cycle in the US wakeboat market peaked at 13,000 units in 2006 and bottomed four years later at 5,000, a 62% decline (source: NMMA). This is a useful yardstick for the current cycle as both periods were shaped by a cultural and economic factor: before 2007, wakeboarding gained mainstream popularity alongside loose credit standards (note: boat sales are correlated to coastal real estate prices), while the recent boom was driven by post-COVID trends toward outdoor activities and exceptionally loose monetary policy. The current cycle topped at 14,000 units in 2021, but the downturn has proved sharper. Industry sales are likely to be around 4,500 in 2024, down 68% in only three years. I believe there is a strong case for this cycle’s recovery to be more V-shaped than the last. Firstly, rising interest rates played a greater role, which increase floor plan carrying costs for dealers and financing costs for consumers (where 5-to-15-year loan terms are common). Second, the magnitude of the decline has already exceeded the post-GFC downturn, with a far healthier outlook for the US economy (and asset prices) than during the great recession.
#2: Wakeboats are an Attractive, High Visibility Niche
If you believe the wakeboat industry will recover, you can be even more confident Malibu will remain the #1 player. The niche is a consolidated oligopoly with structurally higher operating margins than Outboard boats (~19% vs. ~12%). Less than 10 material competitors exist compared to MPX’s estimate of 75 Outboard manufacturers, with the top four around 75%. A large service element provided by OEM-approved dealers—who even handle warranty repairs—creates barriers to entry, making it difficult to displace the three incumbents: Malibu, MasterCraft, and Nautique. Buyers are reluctant to purchase without an approved service dealer nearby and tend to be in more sparsely populated areas where distribution networks take time to build. (It also helps that participation in wakeboard competitions often require being towed by one of the three incumbent boat brands!).
Thesis Risks
The most frequently cited thesis risks revolve around future demand: (i) the so-called ‘affordability crisis’, and (ii) end-market wakeboard declines. Remarkably, wakeboat NSPs have risen 6% p.a. over the last 20 years (from $55k to $170k), rightly stoking fear that pricing was pushed too far. I have less concern with the affordability bear-case, largely as this is not a new phenomenon. In the mid- 2010s, the same sentiment existed, yet NSP growth has since accelerated to 9%. (Ultimately, MBUU sell to affluent 95th percentile customers). Declining US wakeboard participation—from 1m in 2007 to 680k in 2017—poses a more serious threat. However, the reality is more nuanced than the narrative, as this does not capture the rise of wake-surfing, whose impact is difficult to quantify.
Market Recovery Expectations too Bearish; Compelling 16% IRR
Unit sales are the key driver of my $64 p/s fair value and ~50% upside estimate. In this case, the more academic reverse DCF approach is useful for gauging what future units are priced in. At $42 p/s, I estimate the market is only discounting a ~50% recovery (5,500 total group units) versus the pandemic peak, over the eight years to FY30. This strikes me as overly conservative. The US wakeboat market recovered 75% over the ~10 years following the GFC, when there was a deep recession and macroeconomic prospects far worse than the outlook today. I therefore believe a 70-75% recovery (7,700 units) by FY30 is more plausible, with strong visibility that market structures will remain largely unchanged. Historically, EV/Sales rarely fall below 0.75x across the sector, providing downside support at $31 p/s. Despite the recent rally from the July lows, I still forecast shares can return an attractive 16% IRR over the next five years, with a moderate 1.7x risk-reward skew.
Catalyst(s): Reduced dealer floor plan financing costs from front-end rate cuts; boat replacement cycle returns; asset prices remain buoyant.