After 2020, manufacturers in every industry faced onslaughts of costs associated with retrieving materials and supplies for production. Coming out of the lockdown, certain sectors experienced a historic wave of interest-rate-less demand. Over the past few years, the recreational marine vehicle industry went through abnormal seasonality. When outdoorsy America returned from confinement, messy supply chains and desperate dealers led to boat-less customers and dissatisfied companies. Until recently, Malibu Boats (“the Company”, “MBI”, “MBUU, or “Malibu”) and its boating competitors were still solving inventory algebra.
In 2022 and 2023, Malibu posted revenue beats in untraditional selling quarters as dealers built inventories despite rising interest rates. Now with healthier inventory levels, Malibu’s revenue recognition will be tied closer to end consumer purchases instead of over-shipping. Amidst tighter credit conditions and unclear consumer demand, Malibu’s stock has been flat despite the Company’s strong performance. Uncertainty and pessimism have driven Malibu boats to an attractive valuation and price point.
In the next twelve to eighteen months, Malibu is an interesting opportunity given several signals ahead of fourth quarter earnings:
- Strong boat show performance, increased promotional spending, and aggressive pricing dynamics indicate that demand for boats may hold up.
- Malibu’s vertical integration initiatives will allow the Company to capture more EBITDA associated with large boats. Additionally, Malibu will be able to drive volumes through competitive pricing and expanding its dealer network.
- Malibu plans to enter the US pontoon market through greenfield expansion, which could materially drive the top line.
Malibu Boats, Inc (MBUU)
Key Financials (as of 7/18/2023)
- Market Cap: $1,173.5 mm
- Enterprise Value: $1,153.0 mm
- P/E: 6.90x
- EV/EBITDA: 4.5x
- Current Stock Price: $56.90
Quick Malibu Debrief
Malibu Boats is a boat manufacturing company similar to a Ford, Tesla, or General Motors. The Company builds the boat and sells it to a dealership that then sells it to consumers. Malibu sells three different kinds of boats across three segments: powerboats like the one in the above picture (Malibu/Axis), large saltwater fishing boats (Saltwater Fishing), and classic sterndrive boats (Cobalt). These boats can be sold from anywhere between 75k and over a million based on product and customization. Malibu went public in 2013.
Originally, Malibu only sold Malibu boats, but it was really good at making money on them. As the Company became more profitable, it started to acquire other boat brands and make them more profitable. In some ways, Malibu is like an private equity firm that only invests in boat companies.
How much does the macro matter?
Consumer demand will be the primary concern for the recreational boating industry moving forward with the conclusion of offseason over-shipping. With freshwater inventory at normalized levels, Malibu’s revenue will better match the consumer purchasing environment. Amidst the overhang of high interest rates, revenue recognition adjustments, and unclear consumer spending capabilities, investors have displayed low expectations for Malibu in FY2024. Thus, MBUU has traded around a 4.5x EV/EBITDA multiple over the last six months despite strong
performance driven by dealers stocking up inventory ahead of selling season (FQ4/FQ1). Because Malibu’s management only provides guidance for the current fiscal year, the potential contraction in FY2024 is a significant unknown. The sell-side is expecting a 7% decrease in YOY revenue in FY2024, which matches the bearishness seen in the stock. In comparison, Covid-19 caused a 5.5% YOY revenue contraction in 2020.
Given strong boat show performance and pricing dynamics in the industry, contraction in demand is likely to be smoother than expected. According to Malibu’s management, boat show season has been successful but could have improved from lower pricing, and competitors agree. In 2021 and 2022, average selling prices (ASPs) rose significantly. For Malibu, its Malibu/Axis and Cobalt segments’ ASPs grew 15.7% and 19.5% YOY respectively in FQ4 2022. Malibu/Axis and Cobalt brands typically service a customer that is more rate responsive.
Price reductions could lead to more sales
Malibu’s competitors, Polaris (PII) and Brunswick (BC), saw increased promotional activity and early signs of discounting ahead of selling season, which would serve as drivers for price sensitive product volumes. In Malibu’s largest’s dealer and customer last earnings call, OneWater Marine’s (ONEW) management announced plans to be extremely aggressive with its pricing headed into selling season. Extremely aggressive meaning lowering prices to attract customers, and the lower prices will come out of dealer profit and losses not manufacturers. Based on dealer marketing spend, pricing will be more competitive during FQ4 2023 and continue into FY2024.
Additionally, across the board, the boating industry is seeing resiliency in the demand for luxury and large boats. Large-boat segment prices are obviously higher than small-boats and, therefore, typically serves an economically resistant end-consumer. If pricing meaningfully decelerates and luxury boat demand continues, consumers will be seeing discounts in these products for the first time in years. The price contractions could drive a surprise in boat volumes that is not being considered in expectations.
Malibu’s Margin Drivers
Revenue and volume mix are the key drivers to Malibu’s profitability. Based on a segment breakdown of net income before taxes, depreciation, and amortization in the FQ4 2022 10-K, I derived that the Malibu/Axis segment has a ~24% adjusted-EBITDA margin while Saltwater Fishing and Cobalt segments hover around 13% and 17% respectively. Therefore, in quarters when Malibu/Axis possesses a greater share of the revenue mix, the Company should be more profitable. Since FQ3 2022, the revenue share for Malibu/Axis has declined by 6%. Consequently, gross margins contracted nearly 600 basis points.
Malibu M&A History
During the same period, the Saltwater Fishing segment has grown by 5% as a percentage of revenue due to the Maverick Boats Group acquisition in 2020 and the recent demand trend towards large boats.
Malibu’s M&A model is predicated on acquiring boat companies and driving margin expansion through vertical integration. Within the first two years of acquiring Cobalt, the Company was able to double its EBITDA. Management hopes to bring all segments above the 20% EBITDA margin threshold and stated that it could be possible for the Saltwater Fishing segment in two to three years, which could be a huge driver for profitability as the segment continues to grow in revenue share. As part of the vertical integration efforts, in FQ3 2023, management announced the build out of a new 100,000 square foot tooling plant on the Pursuit property. This acquisition has been part of a multiyear plan to bring tooling in-house and the TDC (tool design center) will first focus on the Pursuit brand (part of Saltwater Fishing segment).
Vertical integration refers to relying less on third party services. For example, if you do not have a car and have to take public transportation or taxis to get everywhere, then buying a car would be a personal form of vertical integration. Companies like Malibu use vertical integration to expand profits by lowering costs. Costs like having to wait five extra minutes for that 4-train you missed at 14th and Union.
Additional sources of value
For the Cobalt segment, the Company announced that beginning in the first quarter of fiscal 2024, monsoon sterndrive engines will become available for Cobalt dealers and customers. The engine is the greatest contributor to cost of sales, and a central goal of the vertical integration plan has been to get engine production in-house. With this announcement, management indicated that this could be a triple-digit return on investment and opportunity to strengthen the overall EBITDA margin profile.
During the FQ3 2023 earnings, management announced a 260,000 square foot land acquisition to begin construction of a manufacturing facility for additional flexibility and the ability to enter the pontoon boat market via greenfield entry. In 2021, the pontoon boat market was valued at $2.1 billion. If Malibu is able to capture 5% of the market by 2026, it will have a material impact the top line. Because this plan is unofficial and doesn’t possess a timeline, I did not incorporate it into the base case. However, any future commentary will be material moving forward.
Risks to Thesis
- Before the monsoon engine, General Motors (GM) was the only supplier of engines for Malibu Boats via an agreement that is set to end in November, 2023 unless renewal takes place. There is added risk if the UAW and GM do not sign a contract before September 2023. If a deal is not reached, then it will strain Malibu’s supply chain and create unprojected costs.
- On July 3rd, 2023, the Batchelder case was settled for $100m of which insurance should be able to cover $26m (net $74m sunk cost). The company issued a $75m revolver at 6.25% interest to pay the rest. The settlement could present potential litigation risk in the future but should not affect company operations.
- Interest rate risk is apparent for both dealers and consumers. According to OneWater Marine, the interest rate on loans for it has more than doubled YOY (~3% to ~7%), and the interest rate for customers has nearly doubled YOY (~4% to ~6.5%). Even so, OneWater has seen zero disinterest from lenders to make loans to their customers, who typically have strong credit scores. Currently, recreational boating consumers are a target end market for loans.
- If dealers do not adjust Malibu/Axis prices quick enough and inventory does not need to replenish due to lesser demand, then it could lead to companies like MasterCraft (MCFT), Brunswick (BC), Polaris (PII), Marine Products (MPX), and others to take market share.
- Larger boats have compressed margins due to higher material and labor costs, and Malibu’s vertical integration plans could fall short in the attempt to replicate Malibu/Axis margins for the Maverick Boats Group and Pursuit brands.
Competitive Landscape
| Competitor | Market Cap | EV/EBITDA | EBITDA% | % Change from 52-week high | Revenue/Dealer (2022) |
| BC | $6.2b | 6.6x | 17.8% | 5% | $1.63m/dealer |
| PII | $7.3b | 8.1x | 12.2% | 0.2% | $1.79m/dealer |
| MCFT | $507.2m | 3.5x | 18.0% | 18% | $1.79m/dealer |
| MPX | $586.8m | 9.1x | 13.6% | 0.4% | $0.95m/dealer |
| MBUU | $1.2b | 4.5x | 19.0% | 20% | $3.04m/dealer |
Manufacturers in the recreational marine vehicle industry sell products to dealers (some DTC), license IP, and provide financing to generate cashflow. Brunswick, Marine Products, MasterCraft, and Malibu focus specifically on the boating market while Polaris operates in several outdoor recreation markets. BC is the biggest player with over $2B in boat revenue in 2022. Malibu, Polaris (marine segment), MasterCraft, and MPX are all closer in size and operate similarly. Malibu’s most direct competitor is MasterCraft in end products and licenses its SurfGate and Power Wedge technologies to it. Currently, within the peer group Malibu is trading further from its 52-week high and less than the mean 6.3x EV/EBITDA.
Based on all the peers’ earnings, companies are presently more focused on internal operations than market share gains. In addition to the listed peers, Malibu competes against various boutique manufacturers.
Additionally, it is pretty interesting that Malibu makes the most revenue per dealer out of the group. Malibu touts its dealer network as a differentiator, and this data point supports that claim.
Continue the Research
Unfortunately, there are no more boat shows in 2023, but a boat show site visit would be fantastic primary research to talk to dealers, companies, and especially customers. I would be most interested in speaking with prospective buyers to learn more about their thought process. How often do they look to buy new boats? What is the social status like for having the newest boat on the lake? What is the highest interest rate that they would be willing to pay for a boat loan? Why do they like Malibu versus other options? If I am confident in the answers, then I would boost my outlook for FY2024.
Malibu is a counter-cyclical idea that possesses the potential to deliver upside in the next twelve months if consumer demand surprises estimates while providing long-term value through a disciplined balance sheet, accretive expansion efforts, and continued brand-name success in the recreational maritime vehicle industry.
If you have more questions or want to talk all things MBUU, do not hesitate to reach out on twitter, instagram, or shoot me a text.
Employ your curiosity.
-Maximus Beach
Learn more about Maximus Beach’s background here.
The opinions and statements contained in the writing in this post do not constitute an offer, a solicitation, or a recommendation to enact or decrease an investment or to make any other transaction. It should not be the cause for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs. This content has been produced by Achaion.com and has not had any outside input. Read more about Achiaon.com’s Disclosures and Privacy Policy.
