Boat Sales May Be Cresting. This Stock Looks Ready to Power Through.

The wave may now be cresting, as vaccinated consumers start spending their recreation dollars on trips to Europe and Disneyland. But one of the largest powerboat manufacturers, Malibu Boats (ticker: MBUU), is still looking healthy, with orders going strong well into 2022.

“People started saying a few months ago that demand would decelerate, but we haven’t seen it,” says Malibu CEO Jack Springer. The company has presold more than 80% of the boats it plans to manufacture through June 2022, well above its 50% rate in normal times, he says. “We haven’t seen an order book like this in our history,” Springer adds. Based on current trends, he doesn’t see inventories normalizing until 2024.

The market seems skeptical that the good times will last, assigning Malibu’s stock a low valuation. But even if sales cool off, Malibu should sustain growth, bolstered by market-leading brands, lean manufacturing, and innovative technologies fueling demand for its products.

“They sell into the most attractive markets in the industry,” says Rayna Lesser Hannaway, manager of the Polen U.S. SMID Company Growth fund (PBMIX), which owns the stock. “It’s a well-run business, and they have the strongest brands in sports boats.”

Based in Loudon, Tenn., the company has ramped up production and acquisitions in recent years. The firm bought the manufacturer Cobalt Boats in 2017, added Pursuit Boats in 2018, and made a deal for Maverick Boat Group in January, paying $150 million. Malibu now builds 75 models, premium-priced from $89,000 to $243,000. Production is expected to hit 10,000 boats over the next year. The company recently expanded its Cobalt plants and aims to lift output at Maverick by 30% as it targets the saltwater fishing market.

The playbook is working well, says Berenberg analyst Rudy Yang, who sees the stock hitting $100, up from recent prices around $70. The company successfully integrated Cobalt and Pursuit, he says, squeezing out costs and boosting margins. He expects similar synergies with Maverick once it’s integrated, fueling top- and bottom-line growth.

Malibu generates industry-leading margins, compared with rivals Mastercraft Boat Holdings (MCFT) and Brunswick (BC), partly because it’s more vertically integrated. The company buys engine blocks from General Motors and Volvo and then “marinizes” them for boating, eliminating a manufacturing middleman. Malibu also custom-builds its own boat towers, or frame-coverings, developing power-folding versions for tight spots in marinas or under bridges, along with its own trailers, racks, and flooring. “If it can be made of metal, we’re manufacturing it,” says Springer.

Malibu is also known for high-tech features, including rear-facing cameras, large cockpit screens, and luxury interiors. And it has taken a leading role in developing boats for wake-surfing, a fast-growing watersport.

Malibu-brand boats, its biggest sellers, are prized for wake surfing. The company launched a proprietary surf gate in 2012 that customizes the boat’s wake for the rider. “Wake surfing was hard to do before, and this made it easier,” says Springer. Other manufacturers now offer similar features, but Malibu has vaulted to the top spot in ski/wake boats with a 32% market share, according to Statistical Surveys.

Despite Malibu’s strengths, the stock looks undervalued. Shares trade at 10 times estimated earnings for fiscal 2022, ending next June, below their five-year average price/earnings ratio of 12 times forward earnings. Wall Street analysts see earnings before interest, taxes, depreciation, and amortization, or Ebitda, rising 20% in fiscal 2022. Based on enterprise value to Ebitda, the stock trades at about seven times 2022 estimates.

Skepticism on the stock reflects concerns that the boating boom will soon bust: The industry’s sales tend to dry up in economic downturns and take years to recover. Sport-boat sales collapsed by 63% from 2006 to 2010. Even in a healthy market in 2018, retail sales were 20% lower than their peak in 2006. “Most boating companies haven’t done a great job of sustaining growth,” says Hannaway. “There’s fear that the business isn’t repeatable and the rush to buy boats in the pandemic will abate.”

But the market may be treating Malibu stock too harshly. “The company is being valued as if its business is more cyclical than current trends would suggest,” she says. Revenue should increase at a “low teens” rate over the next five years, she estimates, led by higher production, margin improvements, and some price increases.

B. Riley Securities analyst Eric Wold also expects demand to persist, partly because many first-time buyers started boating in the pandemic, fueling a new replacement cycle. “It will take years to rebuild inventories even to prepandemic levels of demand,” he says, seeing the stock at $103 a year from now. Even at that price, he notes, it would trade in line with its average historical multiple.

Consensus estimates call for Malibu to generate Ebitda of $222 million in fiscal 2022, rising to $243 million in 2023. Those gains are expected to lift earnings per share 18% over the next year to $6.85. At a multiple of 12 times estimated 2023 profits of $7.46, the stock would trade around $90. That looks like a fair price for a boat maker that may be surfing a long wave of demand.

Write to Daren Fonda at [email protected]