MBUU: High quality stock in a turning industry
Opportunity to buy a high ROIC business that has grown EPS at a 30% CAGR since FY2015 at 6x normalized FCF.
Malibu Boats (MBUU)
Current Price (1/8/2025): $35.61
Two-year Target Price: $60.00
Market Cap: $733 mm
(See Appendix for model summary)
Summary: Opportunity to buy a high ROIC business that has grown EPS at a 30% CAGR since FY2015 at 6x normalized FCF.
Business Overview:
Malibu Boats is a leading manufacturer of recreational powerboats in the United States. The business is split up into three reporting segments. The most attractive segment is the Malibu segment at about 45% of 2023 sales and has the #1 market share in the wakeboard boating category. The other segments include Cobalt and Saltwater Fishing segment. The cobalt brand has a #1 market share in the 24’-29’ sterndrive segment. Malibu is an active acquirer and has expanded into the large outboard market (84% of total units), now holding a #2 market share in 23’ fiberglass outboard segment. A key driver of their growth and continued strength has been their vertical integration which allows them to price their boats at about a 20% discount to similar boats from competitors.
The boating industry is extremely cyclical and is currently in a downturn with revenues dropping 40% the previous year. Malibu was able to maintain a positive net income (adjusted) due to its variable cost structure.
Malibu is a market leader in a niche market (wakeboarding boats) which leads to a high ROIC, 17% 2015-2019 average (pre covid), combining attractive investment opportunities with downside protections during downturns makes Malibu a strong cyclical business.
High returns are enabled by a capital-light business model (maintenance capex is 3% of sales) 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:
Malibu has been beaten up trading being down -34% over the past year and about 60% of its highs in 2021. Malibu is dealing with industry wide and company specific issues which has led to this decline. To start with the industry, it is experienced roughly a 10% pull forward in demand during Covid due to people being flush with cash and wanting to be more outdoors. To add on to that, as interest rates began to rise it become much more expensive to finance to the boats which has lead into the cyclical downturn that has been faster and greater than the downturn experienced after the GFC. The company faced three negative news stories in 2023: i.) 15 year CEO Jack Springer abruptly resigned in Feb., ii.) the company’s 2nd largest dealer, Tommy’s Boat’s, went into liquidation and subsequently filed a lawsuit against MBUU, alleging channel-stuffing; iii.) and demand destruction led to a 75% annual drop in unit volumes in the wake boat division in Q4 and a 52% decline in Q1 of FY 2025. I believe these negatives are more short term in nature and provide a good opportunity to buy a high-quality business at a good entry point. The company has no debt, is buying back shares (10 million per quarter), and insiders are buying across the boating industry signifying a potential end in sight for the downturn.
Thesis 1: Market is pricing in a much more negative future than what has historical happened after a downturn.
The last cycle in the US wake boat market peaked at 13,000 units in 2006 and bottomed four years later at 5,000 (due to the GFC), a 62% decline. The rise and decline were due to similar factors as the current cycle. Wakeboarding gained immense popularity leading up to the GFC coupled with easy borrowing standards lead to a significant increase in sales. When the GFC happened, and the economy worsened the wake boating industry was hit hard. This is like the current cycle with the popularity of boating increasing due to covid and the abundance of capital, followed by a worse economy and increasing interest rates due to post covid inflation.
The current cycle peaked at 14,000 industry units in 2021 and experienced a sharper declining. Industry sales are expected to be at about 4,500 units for 2024, which is a 65% downturn in 3 years. If we use the GFC as a proxy for the recovery now, it seems like we are at the bottom of the downturn and volumes will start to recover in 2025 and turn positive in 2026. Also, I believe that the recovery this time will be more V shaped then post GFC: i.) interest rates played a larger role in the decline, which increase floor plan carrying costs for dealers and financing costs for consumers, so the possibility of rate cuts would be extremely beneficial to MBUU and ii.) the magnitude of the decline has already exceeded the GCF with a much better economic outlook than post GFC (potential rate cuts, lower taxes, rising asset prices).
However, the market doesn’t agree with this sentiment and is very negative on MBBU’s future. Using a 30-year reverse DCF, the market is pricing in a normalized recovery to about 5,500 units for MBUU which is roughly half of MBUU’s peak volumes, as well as 0 future revenue growth. So essentially the market is pricing in that MBUU will stay at trough volumes and never raise prices. For the reasons mentioned above I believe that the industry and MBUU’s volumes will and are about to recover. I project out a 62% recovery in volumes by 2028 and 70% recovery by 2032, which is 1 year faster than the GFC however I believe that the recovery has a high chance to be quicker which is reflected in my bull case.
Supporting the analysis above, OneMarine (one of the largest dealerships), on its most recent earnings call expressed positive sentiment on their customers and a return to a positive environment:
- “We are pleased to report a record Fort Lauderdale boat show with a unit sales up double-digits compared to the prior year. The strong activity highlights the sustained customer appetite for boating despite uncertainty in the election and overall economy at the time.”
- “But I mean, if you look at Lauderdale, Lauderdale was a great show. It was kind of like, I mean, and I'll let Anthony jump in on this too because he was on the docks a pretty good bit, but it was like a breath of fresh air. Like, it just seemed different. And I don't know, if it was just -- there was a relief that the unknown of the election was over,”
- “I mean, it's hard to explain, but you just the vibe and the tone just felt completely different than what we've seen in the last nine months.”
- “Yeah. We didn't have a lot of the interest rate conversations with customers. We didn't have a lot of negative conversations where they were waiting for something. Everybody was pretty positive and the boats were priced accordingly and aggressively.”
This supports primary research channel checks I had with boat customers and local dealerships who the majority had a positive outlook for the next few quarters versus the gloomy backdrop that the industry experienced over the past quarters.
Overall, this results in projected 2028 volumes of 6,334 and translates into $1.179 billion in revenue.
Thesis 2: Revenue growth will return to pre covid growth with a 100bps acceleration due to market share gains in large outboard boating section. Consensus is caught up in the murkiness of near-term headwinds and is modeling in minimal market share gains in the outboard segment.
The outboard boat market is the largest segment and makes up about 35% of yearly sales for new boats. Malibu had primarily focused on performance and sterndrive markets with their two dominate brands in Malibu and Cobalt. However, in 2017 and 2021 they began to expand into the outboard segment acquiring Pursuit Boat and Maverick Boat Group. Through their acquisitions they currently have a market share of 18.8% in the fiberglass outboard market and about a 3% market share in the outboard segment as a whole.
Malibu has been successful in driving market share gains with their Malibu and Cobalt brands, capturing a 5.5% gain since 2013 with their Malibu brands and a 6.7% gain with Cobalt since its acquisition. I believe they were able to accomplish this share gain through two vectors: their and vertical integration and enhanced technology. Through their vertical integration they have been able to price their boats around 20K cheaper than competition. Management announced that they would start to vertical integrate the supply chain for their outboard boats like they did with their other segments. If they follow a similar playbook this will allow them to have a better price compared to competitors and drive similar market share gains. Malibu has frequently been ahead on the technology curve with their most important innovation being the surf gate system, allowing for a better wakeboarding experience, and have earned many rewards regarding their technological innovation. As demand begins to normalize, Malibu will be able to return to creating technological advances which will again help capture more market share.
Due to these factors, I am modeling 12% revenue CAGR from 2025-2027 versus the consensus 10% CAGR, with about 65% of growth coming from volume and the rest from pricing/mix.
Thesis 3: Lead by a new management team, Malibu will be able to recover their margins and is returning capital to shareholders via buybacks.
Margins took a big hit in 2024 due to the lower sales, but due to Malibu’s largely variable cost structure (about 90% of COGS), they were able to post a positive adjusted EBITDA, which they used mainly for buybacks. Pre covid adjusted margins averaged around 17% and increased to 18% during the boom from COVID and low interest rates (again showing the variable costs structure). In 2024 margins were 6% due to the low sales numbers which caused fixed cost deleveraging. I expect margins to normalize close to where they were pre covid and model them to return to 14.5% by 2028 (which is still a 3% discount). This could prove to be much to conservative as Malibu is much more vertically integrated then they were pre covid, which is the belief held by management as they target around 20% normalized margins.
In Q4 of FY 2024, Malibu paid down all their debt which allowed them to return about $10 million to shareholders via buybacks and followed suite in Q1 FY 2025 with another 10 million in buybacks. Malibu also recently hired a new CEO, Steve Menneto, who based on his previous tenure at Polaris seems like a good hire. He ran Polaris’ Motorcycle Division, during which time he drove significant growth, including building the Indian Motorcycle business from $3 million to approximately $500 million in revenue. Following his success their he then moved to the Off-Road vehicle division where as president he nearly doubled the division’s revenue to $7 billion over the course of four years. Time to tell how effective he is but if his past results are indicative of the future he is a welcomed addition at the helm.
Valuation:
Now is an attractive time to enter a position as the boating industry begins to recover. I am projecting one more quarter of negative y/y growth before returning to positive y/y growth in Q3 2024, which should reaccelerate fundamentals.
The stock is currently trading at a 11x NTM PE multiple. The stock is trading in line with its 10 year NTM PE multiple average of 12x. While growing revenues at elevated levels from the pull forward and low interest rates the stock traded at a high of 20x NTM EPS during Covid. Its closest competitor, MCFT, is trading at a 4 turn higher multiple of 15x, whereas typically MBUU has traded at a slight premium. This reversal is due to the legal overhands and management uncertainty which I expect to be short term.
While the stock is trading at the upper bound of its average multiple, looking out to 2027 and a more normalized environment the stock is trading at 6x my projected P/E multiple and about 6x normalized FCF in FY 2027 (margins return to pre covid normalized levels and 2% of sales maintenance capex).
I project that the business will return to a more normalized operations by FY 2027, with revenues growing in line with 2015-2019 averages of LDD y/y and HDD EBITDA margins. These assumptions leads to a normalized revenue of about $1.066 billion. With an adjusted EBITDA margin of 17%, which is inline with pre covid levels (and below managements guide to 20%), gets a normalized EBITDA of $186 million, which translates to a base case EPS of $5.97.
For my valuation I am using a probability weighted valuation method (25% bull case and 75% base case to arrive at a price target of $60, or 70% return in two years using 2027 estimates. For my base case I used a NTM PE multiple of 9x which is line with its normalized pre covid average when it was growing revenue at a similar rate (2016-2019) and for my bull case I used a 11x NTM multiple.
For my risk case, I assumed essentially no recovery in volumes from FY 2024 and ASPs returning to pre covid levels, and no margin recovery from trough 2024 margins. Applying a P/E multiple at their lower band of 7x, yields a price target of $24, or a -32% return. This results in a risk reward skew of 2.3x.
Risks:
Risk 1: Sustained cyclical downtrend due persistent inflation and less rate cuts
Recreational boating is a very cyclical industry with many boats being financed when brought, if interest rates stay higher for an extended period of time or the economy gets worse it could impact Malibu’s sales and the industry might take longer to recover.
Mitigants: While Trump offers a potential catalyst it is hard to predict when the market will turn, however there are signs, like revenues in Q1 2025 declining less than the previous quarter for the first time and volumes declining more than GFC. Ultimately that is why buying at a margin of safety, 6x normalized FCF, allows us to wait out the industry cycle, while getting paid via share buybacks.
Risk 2: Affordability crisis and shifting consumer preferences
Risk: Wakeboard prices have risen 6% p.a over the past 20 years from $55K to $170K, elevating fear that pricing as pushed to far. Consumer preferences have begun to shift, and wakeboarding isn’t as popular as it used to be, with declining participation.
Mitigants: The narrative that prices are too high has been around for a while. In the 2010’s the same sentiment existed, yet the ASPs have experienced 9% growth p.a. Ultimately, Malibu is selling to the affluent and top 95% who are much less price sensitive.
Wakeboarding participation has declined in the US from 1m in 2007 to 680k in 2017. However, with the decline of wakeboarding the rise and popularity of wake surfing followed which is very similar (not holding onto a rope) but is harder to quantify. So, while on a headline basis it looks bad, under the hood it doesn’t seem as bad as people still use Malibu boats to wake surf instead of wakeboarding.
Catalysts:
1.) Potential rate cuts, lower taxes, and a more pro-business regime
2.) Recovery of boating industry and returning to a normalized environment
3.) Continued buybacks
4.) Overhead lift from litigation and new CEO
a. Expert network transcripts all negative on old CEO
5.) Last quarter of tough comps, followed by y/y positive revenue growth
6.) Insider transactions across the boating industry
7.) Replacement cycle from Covid purchasers coming within the next 6-12 months
Appendix:
