Description

Summary

MarineMax (HZO) is a pandemic lottery winner that’s benefitted from a generational demand shock in marine sales which created a massive earnings dislocation set to peak here in F22 (Sep). Thesis suggests post-pandemic marine category retail weakness is finally starting to reflect more than just lack of inventory availability as dealer checks suggest evidence of waning consumer demand continues to mount. Given the magnitude of favorable earnings impact, aggressive recent deployment emphasizing external growth and potential for heavy pull-forward in the category, risk/reward appears asymmetric to the downside despite the stock being down nearly 50% YTD and trading at 4x F23 consensus EPS. 

Retail sales declines throughout the year have been blamed solely on lack of inventory but recent dealer checks suggest accelerating declines in written business and consistently slowing door swings while pre-sold inventory cushion continues to get worked down. As such bullish narrative based on continued elevated demand likely becomes increasingly shaky and attributable to carryover demand. Category normalization has the potential to be severe given historically poor value prop across both key time and money criteria. History of prior cycles ending with demand air pocket vs glide path lower should also become increasingly top of mind with investors especially given demand pull-forward concerns. 

Gluts tend to follow shortages and this category is likely to prove no exception. More than an entire year’s worth of production has potentially been pulled forward and suspect the pandemic new buyer cohort likely churns even faster than typical >50% exit rate within 10 years. ASP has been carrying the day recently as unit volumes have been deteriorating as manufacturers have taken DD% price over the past two years and emphasized higher-priced models. Even on sustained higher demand outlier TTM P&L dynamics vs 20-year history scream mean-reversion (i.e. 20% flowthrough vs 8% avg pre-pandemic trailing 5 years) and recent acquisitions point to G&A expanding by up to 50% this year. 

Management has made a big bet that improved boating category dynamics are structural by deploying ~$700M in M&A thus far during the pandemic demand shock including recent $480M IGY Marinas buy. This has probably been exacerbated by emergence of rival consolidator ONEW which has been aggressively rolling up dealerships since Feb 2020 IPO. In that latest deal HZO is buying a collection of superyacht marinas for $480M cash + $100M earnout two years after closing expected 1H 2023. Paying 5x sales or more than half its current market cap in cash for <5% of its 2022 revenue base while trading at <0.5x sales represents by far its most aggressive bet yet to diversify away from its core business and outrun eventual mean reversion in new boat sales.

Stock trades 4x F22 EPS almost certain to prove to be peak. Having followed this name since prior to the GFC, valuation has proven to be a very poor signal this late in any cycle much less the current unprecedented one. Potential downside is also exacerbated by execution of over the last two years of the most aggressive M&A cycle in the company’s history. Market’s likely to continue heavily discounting massive overearning here on poor pre-pandemic business quality and uncertainty regarding magnitude of any post-pandemic giveback. Sentiment also likely to remain fragile with the company likely needing to continue to prove the negative for the stock to remain bid.

Primary catalyst is entry into downward revision cycle on accelerating demand weakness with combo of negative operating leverage in inherently low-margin business and dramatically increased fixed cost base making giveback in F23 and beyond scary enough that an additional 50% downside is in play. Primary risk is structural and company-specific dynamics combine to allow for continued financial performance at/above expectations. This is still very much a model based on new boat sales thus category reversion should overwhelm any company-specific considerations including mix shift toward higher-margin services.   

Catalysts 

Imminent entry into a downward revision cycle that proves to be far worse than the market has started to anticipate. 

Risks 

Continued financial performance at/above expectations supportive of structural vs cyclical change in marine category. 

Relative illiquidity and positioning including 12% SI.  

Thesis 

Thesis suggests massive earnings dislocation driven by generational cyclical dynamics is set to normalize and prove much more severe than anticipated. 

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Catalyst

Entry into downward revision cycle