Description

Mastercaft (“MCFT”), a boat manufacturer with a market cap of $467 million is a compelling long with 40-60% upside.  The long case is comprised of the following:

1)     Post COVID boat demand is not 1x.  While boat demand is certainly cyclical, I believe COVID has kicked off a new cycle, very much like it has done with housing.

2)     MCFT is cheap to comps (4.8x 2022 EBITDA and 4.3x 2023 EBITDA) while offering organic growth potential superior to its peers via the rapid growth of its Aviara brand – a brand new line of luxury day boats

3)     MCFT has limited CAPEX needs and recently initiated a $50 million share repurchase plan (~10% of market cap)

4)     On December 29, 2021, Coliseum Capital filed a 13D announcing a 5.8% position in the stock

5)     Stock positioning offers favorable earnings set-up:  MCFT earnings on 2/3/2021 and stock is down 13% YTD.  Boat stocks are generally shorted under the view that boat demand is COVID peak.  HZO printed 1/27/22 (stock up 10% last 2 days, 10% float short, 8x days to cover) and MPX printed 1/26/22 (stock up 9% last 3 days, 3% float short, 15x days to cover). 

Boat Demand

I have been a boater for the last 15 years.  My first boat was purchased back in 2011 for 40% off MSRP – it was a brand new 35’ Formula 350 Sun Sport custom ordered from the factory.  40% off is NOT a typo.  Post GFC crisis, demand for boats was abysmal and both dealers and manufacturers were desperate to sell boats.  Many manufacturers even skipped model years post financial crisis because there was no sense to building spec boats to just have them compete on the open market with the glut of foreclosed inventory and no buyers.  Four years later in 2016, I decided to downgrade my boat from a 35’ Formula to a 29’ Worldcat.  I also bought the Worldcat new, but this time around I only managed to get 20% off retail.  So the market steadily improved, but even in 2016, it was still pretty hard moving boats.  Fast forward to today, most dealers are easily selling boats between MSRP or maybe up to 10% off… and there is zero inventory with long wait times. 

Just like happened with the US Housing market, the boat market absolutely crashed during the GFC.  The wave of bankruptcies and destruction of credit left many boats in the hands of banks and this created a nearly 10 year bear market in boating.  It has taken the better part of 10 years for us to work off the hangover in boat and housing.   So when COVID hit, we were somewhat at an equilibrium on boat supply / demand.  Then all hell broke loose.  So what changed with boat demand and how much of it is structural vs. 1-time?  COVID fundamentally changed lots of behaviors, here are my observations:

·        Suburban Migration.  People generally fled the cities due to onerous lockdowns and the ability to WFM.  This past Friday, a top story on Bloomberg read, “NYC School Enrollment shrinks 10% to lowest in years on Pandemic”. If you are living in NYC with a couple kids, and move to CT or NJ, your chances of buying a boat go from zero to some positive number

·        Vacation Home Utilization.  COVID WFM has changed the way people use their 2^nd homes and vacation homes.  If your summer vacation home was previously used for a couple weeks in summer and a handful of weekends, it was tough to justify having a boat.  But if you are now in a situation where you are spending entire summers at your vacation home due to the WFM flexibility, you are more likely to own a boat

·        Blue State Migration.  I am a NYC area boater.  The season is short.  The migration from blue states to warmer red states is real post COVID.  If you were on the fence about owning a boat up in the northeast or were in state where boating wasn’t practical, then moving to sunny Florida just turned your 3-month boating season into potential year-round activity

·        COVID waive of retirement / wealth effect.  Lots of people have decided to throw in the towel and retire post COVID.  This is especially true for the those that might have benefited from all the stock market wealth that’s been created as the market has about doubled off the COVID lows of March 2020.  The propensity to buy a boat goes up when you don’t work 60 hours a week anymore and are looking for hobby or a fun way to spend time with kids and grand kids.

The bottom-line for me is that we simply are not going back to the way we were.  People are not going to move back into cities en masse.  Nor will they give up their new lifestyle of working from their vacation homes in some sort of hybrid WFM model.  The blue state migration is not going to reverse itself.  Freedom, lower taxes, better work like balance are here to stay.  And with that, I am bullish that boating demand is at a new plateau with growth ahead.  The “older” Millennials have spent the last 10 years living in their parents’ basements, and now investment banks are floating $200-250k packages for 1^st year IB analysts and upwards of $400k for MBA graduates (the “younger” Millennials).  10 years ago it seemed laughable to suggest a 27yr old DINK in NYC could afford a $2 million place to live.  Now that seems doable, and you can throw in a 250k boat once they decide to WFM from CT or NJ.   The last comment is somewhat facetious, but boat demand is on fire at every price point and its coming from all age categories. 

Mastercraft

Mastercraft is one of the handful of public boating stocks.  Other manufacturers include Brunswick (BC), Malibu (MBUU), Marine Products (MPX) and boat dealers, MarineMax (HZO) and OneWater (ONEW). All these stocks are generally shorted and trade at what many would consider low multiples.  The dealers around 4x EBITDA and the manufacturers 4.5-6.5x.  The boat dealer multiple discount makes sense.  These dealers are making windfall gross margin due to constrained boat supply.  Kind of like how those Toyota dealers are charging you MSRP + $5k to buy that 2022 Toyota Sienna right now.  That is not sustainable as when volume come back, dealer gross margins will get hurt.  On the other hand, the manufacturers should get margin expansion as production ramps with easing of supply chain and higher manufacturer utilization. 

Mastercraft, I think benefits in two ways.  Right now, they have about 25% spare capacity that they can’t produce more units because of supply chain.  Secondly, even with supply chain constraints they are taking share because they have a killer post COVID brand (Aviara).  Let me explain.  Mastercraft in many respects got lucky w/ COVID.  Back in 2017, Malibu bought Cobalt boats.  Cobalt was a leisure day boat brand focused on small to medium sized bowriders (24’ to 35’).  I think MCFT was bummed they lost this deal and so they decided to build their own brand to target this market.  In the ensuing years, they decided to build their own line of luxury bowriders from scratch.  Without COVID, this was a very aggressive bet because they basically made a bet on boats priced $350k to $1 million.  Now Aviara isn’t even comparable to something like Cobalt.  It’s like trying to buy the Honda Civic brand, and then losing, so you go design a BMW 3-series, 5-series and 7-series all in 1 shot. 

Mastercraft launched Aviara with 3 models.  (AV32, AV36 and AV40).  It was a clean sheet design and in my boater enthusiast opinion, nothing can touch it at the 32’ and 36’ model price points.  Remember what I said about the last 10 year bear market in boats?  Not many guys launched clean sheet designs in the 30-40’ range.  The other thing is, when you look at larger bowriders in the 30-40’ range, there isn’t a ton of competition.  The styling and finishes are impressive.  If you were building a brand from scratch post COVID, Aviara is what you end up with. This is the kind of boat you would see in James Bond movie: 

https://www.aviaraboats.com/#welcome

Full disclosure, I ordered a AV36 last fall after exhaustively looking at every single brand that could build a 36’ luxury day boat at $500k +/- 100k.  If you are interested in learning more, check out Youtube for multiple reviews by boattest.com on the various Aviara models. 

Mastercraft only recently started disclosing Aviara unit sales.  In the 3Q 2021, they sold 19 units total for $5.9mm.  In 3Q 2020, they sold 13 units, for 3.8mm.  Initially they launched the AV32, then the AV36 and finally the AV40.  So in 3Q2020 is was likely all AV32, then probably only a couple AV36 in 3Q2021.  Up until last year they were making the Aviara in Tennessee alongside their Mastercraft brand.  But they just bought a 140,000 sq foot facility in Merrit Island, FL and moved the entire Aviara line down there.  For calendar 2022, I think their plan is to build about 10 boats a month, comprised of 6 AV32, 3 AV36 and 1 AV40.  If you run the math on this, it’s about $45 million revenue contribution for a brand that did zero revenues a couple years ago.  And by 2024, I think it could be a $100 million revenue brand.  I also think they are going to launch a 4^th model once the supply chain allows – best guess would an AV28.  At the lower price point, I think they sell a ton of them due to massive addressable market.  Personally, I think the bigger opportunity to grow the brand is at the smaller size vs. AV40.  While the AV40 is nice, at nearly $1mm retail, the buyer set in small, and you have lots of competition at this segment. 

So, Mastercraft not only has the ability to grow units as the supply chain eases, it also has a compelling product to take share from competitors by continuing to grow its Aviara brand.   

2022 Guidance / CAPEX / Cash flow

MCFT’s guidance for 2022 (ending June 2022) suggests EBITDA of between $110-115 million.  The biggest wildcards to me is supply chain slippage and inflation. With the 2022 model year switch in mid 2021, MCFT raised prices across the board mid-single digits and then again raised them about 10% effective January 1, 2022.  Demand didn’t flinch but supply chain issues could move revenues into subsequent quarters.  For example, this happened last quarter due to timing of Yamaha engines (coming from Japan).  The 2022 CAPEX guide is $25-30 million.  So EBITDA – CAPEX is basically $85 million on a market cap of $467 million and the company has modest net debt of $73 million.  Last quarter management announced a $50 million stock buyback plan.  I spoke to the company and I am fairly confident that this is not a token buyback to “offset dilution”.  I think management either on their own, or via activist pressure think the stock is too cheap and are likely to act on this buyback. 

Coliseum Capital – 13D filing

These guys filed a 13D on 12/28/2021 with nearly a 6% position.  I reached out to them to discuss, and they gave me the Heisman.  I have no idea what their plans are or what they might be suggesting to management.  Worst case is they are merely a “passive” activist trying to rattle their saber.  Best case they might be trying to put the company up for sale.  Maybe middle ground is an accelerated stock buyback?  If anyone knows anything about them, or what their thought process is, please share in comments.  I really don’t see this as a negative as I think their average cost is above current trading levels as they acquired shares during 4Q2021.

4Q2021 earnings – 2/3/22

I have no idea if MCFT will miss or not.  The timing of shipments is a black box because of the idiosyncrasies of supply chain.  What I do know is that boat demand is unchanged, and their product is in very high demand.  Buyers are not flinching about recent price increases.  All the boating stocks have been hit with a sell off during the month of January.  Those stocks that have announced (MPX and BC) have traded well post print.  These are all low multiple stocks but somehow are losers on the re-open trade.  The boating stocks are priced like melting ice cube businesses right now.  So between the well-publicized supply chain issues, inflation, peak demand, etc., I think the downside case is priced in. 

Valuation

MCFT is 4.8x 2022 EBITDA and 4.3x 2023 EBITDA.

MBUU is  5.7x 2022 EBITDA and 5.4x 2023 EBITDA. 

I think MCFT should trade at least to parity with MBUU (closest comp), and arguably above due to superior organic growth prospects.  I also think these boat stocks are cheap to begin with. 

My target price on MCFT is $36, derived from 6.0x $125mm EBITDA for Fiscal 2023.  Fiscal 2023 for MCFT is 3Q2022 to 2Q2023. The $125mm EBITDA is street consensus and doesn’t bake in the upside I believe the Aviara brand offers.  I could see $40 on this stock with a launch of something like and AV28 and a nice capacity increase at the Merrit Island facility – as Aviara ramps, it should be margin accretive. 

Risks

·        Supply chain issues get worse

·        Inflation problem gets worse

·        Fed implodes economy with too many rate hikes fighting inflation

·        MCFT isn’t serious about stock buyback

·        Dumb M&A

·        Coliseum Capital activism is a bust and/or they become forced sellers 

Catalyst

Contined execution

Stock Buyback

Activist Update