Description

Short Marine Products (MPX)

Marine Products manufactures and sells recreational fiberglass powerboats to independent boat dealers. Its main brand is the Chapparral sterndrive boats, but the company also makes Robalo outboard fishing boats. Average selling price of MPX’s products is $44,000 and average household income of its customers is approximately $80,000.

Trading at 22x forward earnings, MPX is priced like a compounder that will grow earnings for years to come. In reality, recreational powerboat has been a declining industry that’s also very cyclical. Powerboat sales peaked in 1973 and has suffered through many cycles after that, with each peak lower than the previous one. In the last 10 years, the company generated $100M of FCF in aggregate. Today’s TEV is $600M. Given the cyclical nature of the business, MPX should trade more in-line with automakers rather than at low single digit earnings yields.

Boat sales is highly correlated with consumer confidence, residential real estate prices and mortgage originations. In 2007, MPX sold 5,444 boats. In 2009, it sold 963 boats. Although ASP has been firm as of late due to shift of mix into larger boats, pricing isn’t a long-term tailwind because it has barely changed from 10 years ago.   

Upper right: red line=rolling 12M ship wholesale shipments; grey line=Consumer Confidence

Lower left: orange line=Case-Shiller Home Price Index Composite 20 (SA); yellow line=US boat retail sales; green line=same 20 MSAs boat retail sales

Lower right: orange line=light vehicle sales; yellow line=power boat sales

Roughly 40% of MPX’s sales are sterndrive boats, a very problematic segment of the market. Sterndrive boat sales peaked in 2005, and 2017 sales was 20% of 2005’s level. Outboard boats have done better - they have higher power-to-weight ratios which give more “zip” and better fuel economy. The external engine placement in an outboard boat also allows more cockpit space and easier maintenance. Finally, sterndrive boats are about $30k more expensive than outboard boats because their engines need to use catalytic converters. MPX has counterbalanced the sterndriven market decline by capturing more market share after the GFC as some competitors went out of business, but now five players control 60% of the market and I believe it would be harder for MPX to capture more share going forward. In the faster growing outboard market, MPX’s Robalo boats only have 5% of market share and the industry is much more fragmented with top 5 players controlling less than 30% of the market.

Although MPX doesn’t have debt, its dealers are heavily reliant on access to credit. About 74% of MPX’s product shipments are made to dealers utilizing floor plan financing programs. Under these programs, a deader establishes a line of credit with a lender for the purchase of boat inventory. When the boat is sold to a retail customer, the dealer repays the lender. To assist dealers with securing floor plan financing, MPX agrees to guarantee its dealers’ debt. If a dealer defaults, MPX has an obligation to repurchase the inventory repossessed by the lenders. MPX’s dealers are not exclusive, but dealers increasingly only have one lending relationship because some lenders have exited the market. When dealers default on a credit line, the lender would generally invoke repurchase agreements of all manufacturers supplying the defaulting lender, regardless of whose boats the dealer in fact defaulted on. This puts boat manufacturers in a vulnerable position as problems can become contagious. During the GFC, Textron exited the floor financing business, and other floor plan lenders hiked interest rates on inventory aging on the floor. Lenders also demanded that manufacturers raise their contractual repurchase limit. If we go into another credit crunch, distressed dealers would cause sales to plummet.

On the consumer side, rising interest rates and a tightening credit market would obviously dampen demand for expensive toys. In addition, with gas price now at $3, what many boat manufacturers touted as a tailwind to demand a couple years ago just became a headwind.  

MPX’s operating margin expanded nicely from 3.7% in 2010 to 11.7% in Q1 2018. But this is a high fixed cost business (80% of cost is fixed) and margin has benefited from 10 years of sales recovery. In 2009, MPX’s gross margin was -17% as fixed costs were spread over lower production volumes. It’s worth noting that MPX doesn’t have a revolving credit line, which would be useful when the cycle turns and cash flow turns negative.

I think midcycle earnings power is probably 24 cents/share ($150M sales, 7% operating margin and 21% tax rate). At 15x P/E, the stock is worth $3.6, or 80% down from current prices.

Catalyst

Higher interest rate and energy prices dampen demand 

Less rosy economic outlook