Description

Investment Thesis – MarineMax, Inc. common stock is a short because:

■ MarineMax is a terrible business

■ MarineMax is over-earning due to a cyclical peak in boat sales

■ The stock is approximately 70% overvalued and even in a best case scenario shares are only fairly valued

■ MarineMax’s primary market is in secular decline

Business Overview

MarineMax (HZO) is the largest recreational boat dealer in the U.S. with 53 locations across the country. The primary products are new boats (64.3% of sales) and used boats (19.9% of sales) with remainder coming from accessories and various services. MarineMax focuses on higher-end products with an average new boat price of $171k. Brunswick Corporation (Boston Whaler and Sea Ray brands) is HZOs largest supplier accounting for 40% of revenue while Italy-based Azimut is the second largest at 12%.

MarineMax is a Low-Quality Business (like really bad)

This is clearly a low-quality business. Over the last 10 years ROIC has averaged 0.9% and even in the best years has never been in the double –digits. Over the past 12 years total cumulative cash flow has been only $36mm or just 7% of the current market cap (it would have been even worse except that the company closed a bunch of stores in 2009 and liquidated 200mm+ in inventory). In these same twelve years cash flow to equity (after stock comp) has been positive only three years.

Boating is in Secular Decline

After adjusting for the cyclical nature of sales, boating in general appears to be in secular decline. In the U.S. new powerboat sales peaked in 1973 at over 500,000 units. Over last 40+ years, new powerboat sales in the U.S. declined steadily with each cyclical peak below the last. From 1965 – 1991 new powerboat sales averaged 400,000 units. However, from 1992 – 2006 sales averaged 309,000 units and from 2007 – 2014 sales averaged only 173,000 units. In 2015, 6 years into the cyclical recovery sales are only expected to be 177,000 units or 43% below the previous peak of 307,900 set in 2004. Similarly, U.S. boat registrations declined each year for the last 5 years to a new low of 9.7mm in 2014, down 11% since the last peak in 2001.  (Note: text in this paragraph is fragrantly plagiarized from the Off Wall Street initiation of Brunswick Corp on 11/29/15). There is likely no specific reason for this decline, but rather a long-term shift in how people choose to spend their leisure time (the same reason you don’t see too many people going on fox hunts today).

MarineMax is Likely Over-Earning

Boat sales are highly cyclical and economically sensitive. HZO’s operating margins have ranged from 7% in 2006 to -12% in 2009. Estimates for fiscal 2016 assume sales per store that are approximately 18% above the company’s 16 year average and gross margins that are 80bps higher.  While this may not sound like a huge difference, it yields cash profits for 2016 that are over 3x higher than long-term averages (calculations shown in the Appendix). Given that there is no reason to believe that future cycles will be stronger that the past (indeed they should be weaker due to the secular decline in boating), we can have fairly high conviction that earnings in the future will be materially lower than they are today.

Fair Value is Approximately 70% Below The Current Price

Lets assume however that MarineMax is not over-earning and that boating is not in secular decline. Under these assumptions it would seem correct to assume that HZO’s trailing earnings are about equal to normalized mid-cycle earnings. In the past twelve months, HZO’s net cash income was $0.56/share. If you capitalize those earnings at 9% you’d get a fair value of about $6.25/share or about 70% downside from the current price (calculations shown in Appendix). This valuation appears conservative since there is evidence that MarineMax’s current earnings are in fact higher than normalized levels and that boating in general is in secular decline. Had we incorporated these factors the resulting valuation would have been lower.

HZO is Only Fairly Valued Even In a Best Case Scenario

Even in a true “best case” scenario HZO is not cheap.  To construct a best case we’ve first assumed that sales per store get back to previous all-time highs achieved in 2006. On the cost side we assume that gross margins are 140bps above long-term averages and SG&A does not increase beyond F2016 estimated levels. Under these assumptions, HZO’s operating margins would be 8.6% which is well above previous all-time highs of 6.9%.  In this ‘best case’ HZO would earn $1.95/share in cash flow to equity which is about a 10.1x multiple on the current price. While 10x is a low multiple in an absolute sense, it actually doesn’t sound particularly attractive for such a low-quality business that is likely to decline over the long-term. As such, it seems fair to conclude that HZO is not cheap even in an aggressive best case.

Key Risk

The key risk is simply that MarineMax sells significantly more boats than we expect on either a normalized or peak basis. A number of factors could cause this to happen such as; a particularly strong macroeconomic cycle, new products that spur boat sales or a general increased interest in boating. While any of these factors (or others) could occur, there is no reason to believe they are likely.   

Appendix: Valuation

Catalyst

Lower future earnings