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ONEW was written up as a short on VIC back in March 2020.
The bull case on ONEW is that normalized EPS is approximately $5.00 and the NPV of high ROI M&A is approximately $300M. against a share price of $55 and a market cap of $660M with forward pro forma EPS of $8.50.
The company recently guided to $7.35 in EPS, however this excludes their 2 most recent acquisitions, TH Marine and Norfolk Marine. Combined, those two deals will add over $1.00 in EPS, after deducting interest on the debt used to finance the deal.
I estimate Normal EPS at $5.00, pro forma for announced deals.
I start with pre covid EBITDA margins of 7% to 7.5%. for comparison, HZO’s margins were 6.0%. However, HZO skews towards yachts and those are higher gross profit dollars but lower gross profit margins. Pre covid, top dealers would consistently earn approximately 5% net profit margins based on industry trade magazines. ONEW should have better margins than top dealers, this supports normal EBITDA margins above 7.0%.
I then add the mix shift of recent deals: a couple high margin marinas and the high margin acquisition of TH Marine. TH Marine was bought for $185M and has nearly 20% EBITDA margins. It is a maker of niche branded boat parts.
I believe there is substantial evidence that some of the elevated covid demand will remain. First, it’s been nearly two years since the start and there is no sign of new boaters dumping boats. Used inventory are at record lows. Second, I’ve spent quite a bit of time researching the hypothesis that fitness and outdoors categories will permanently change due to covid. many surveys and data indicate this is the case. Demand for boats is up > 25%. I assume 10% remain. At incremental margins of 20%, that will add ~100 bps to margins going forward and 10% to revenues. The boat dealer industry was in secular decline until just before covid. it decline from 5.3k dealers in 2008 to 4.0k dealers 10 years later. Before covid, many small dealers were barely getting by and an extra 100 bps margin to the industry will not induce competition, rather it will prevent further dealer bankruptcies.
Pre covid, revenues were running at $827.5M pro forma through sep 2019 (F-15 of their prospectus). Since then, they have completed 7 acquisitions, which will add nearly $350M to revenue. If we assume those revenues are inflated 20% due to covid, we arrive at proforma revenue of $1.11bn. allowing for CPI inflation alone gets you to $1.2bn for FY Sep 2022. So assuming no covid revenues remain, I would apply the 8.16% EBITDA margin above to $1.2bn and get EBITDA of $98M and $64M of net income. 25% of which goes to minority holders, resulting in net income of $48M or $4.00 per share. It is then appropriate to add 3 years of organic volume growth independent of covid to arrive at normalized FY 2022 revenue and EPS. let’s say it is a cumulative 5% bump. That results in revenue of $1.26b of revenue and $103M of EBITDA and $50.5M of net income or $4.20 of EPS.
However, I believe some of the covid bump is permanent. If I model another 5-10% revenue bump (vs a 20%+ covid bump) at high teens incremental margins I end up with an extra 75c in EPS. call it $5.00 in normal EPS.
I have them beating guidance. I assume a partial rollback of covid overearning this year and I end up with $9.00 of EPS allowing for a small amount of further M&A. compared to their guide of $7.35 at the midpoint, I would add $1.10 from announced deals, plus I am ahead MSD on my own estimates, plus MSD from further deals.
MARGINS HAVE ROOM TO RISE FURTHER AND ADD ANOTHER 20% TO EPS, OR NORMAL EPS OF $6.00
Furthermore, there is room for margins to rise further, without a change in mix. First, the company has cost synergies to deploy across all its deals. There is room for small savings in COGS and reduction in middle layer management and dealer overhead as regions become more dense. I estimate that at 40 bps. Second, the biggest potential is the impact of rolling up local markets into local oligopolies or duopolies. ONEW is located across 18 cities. I find that they acquired multiple brands in 8 of those cities. And in 5 of those 8, they reduced competition to an oligopoly or duopoly. If they end up controlling more than half the brands and revenue in the mid range to upper range boat category, they will have some pricing power. I estimate this can add another 50 bps to margins over time.
Combined, these factors can add 20% to EPS. this will get you to normal EPS of $6.00
THE VALUE OF THE ROLLUP – LIKELY TO DEPLOY OVER $1BN IN CAPITAL AT MID TEENS ROIC
The company says they double EBITDA 2 years after an acquisition, independent of the covid bump. I cannot find evidence that this is the case. I find that EBITDA margins rise 150 bps and sales rise 25%. That still allows for a high teens ROIC with a path to > 20% ROIC. I arrive at my estimates by digging in deep into their financial statements and by calling several former owners of dealers ONEW acquired.
I calculate ROIC as: (EBITDA less Depreciation less Floorplan interest expense less taxes)/(total purchase price). I treat the floorplan debt as accounts payable and the interest expense as an operating cost.
Here are the reasons for the high ROIC. 1) They do not follow the HZO approach. HZO rebrands dealers and applies a cookie cutter approach. Instead, ONEW capitalizes on a dealers’ brand and reputation. They keep managers and employees on. 2) small dealers lack the scale to do F&I in house, and they sell it poorly. What could be 3-4% of revenue at 100% gross profit ends up being half as much. This ends up contributing 50-100 bps of margin, net of sales commission, and 150 bps of revenue in most cases. 3) small dealers do not have access to inventory of hot models. ONEW can move inventory around the country. This typically adds 10% to SSS with good incremental margins. 4) they install much better software: CRM tools and KPI monitors. This makes the salesforce more effective. 5) there are some back office synergies and synergies in some middle management roles (e.g. marketing can be done by a regional person)
How much capital can they deploy?
There are 4k dealers in the country. The vast majority are mom and pops. ONEW will only acquire high quality dealers with leading market share, great management and at a good price. Right now they source deals through trade shows, friends of dealers they acquired and OEMs. This is the reason they do not squeeze OEMs on margins like HZO does. They want OEMs to feed them high quality deals. OEMs will not do that if they view ONEW more as a threat than ally. If we assume 1k of the 4k dealers could be good enough to own and they turnover once every 20 years, there should be 50 dealerships a year to acquire. Their track record is ~4 per year. This suggests they have ample room to eventually acquire closer to 10 a year. I was a shareholder in CSU CN and I know how they scaled their M&A. ONEW can do the same. Right now they have no need to, the deal pipeline will eat up their FCF. but they are open to scaling it should the need arise.
If they could eventually acquire 8 dealers a year, at an average of 2 locations per dealer, you could see them acquire over $150M a year in revenue this way.
Of course, they could also pay up for larger chains but earn a lower ROIC. I forecast a mix of both.
Lastly, TH Marine is an exceptional platform for more M&A. it’s an amazing acquisition. The team is very much like Austin and Anthony at ONEW: honest, aggressive and cemented as the gold standard in the industry. for example, TH Marine works with champion anglers (fishermen) to design products. TH Marine is known to have the best in-house R&D team and they are the go-to partner for anglers to partner with when they develop products. Basically, TH Marine are true fishermen fanatics with great engineering talent. And they are very entrepreneurial. TH Marine should be able to deploy $15-20M a year on small deals, with an ROIC at 15%+. They can also do midsized deals on top of that.
Here are my range of forecasts for M&A
GREAT MANAGEMENT TEAM
ONEW are the gold standard. Every single OEM and dealer is spoke with has only good things to say. Honest, smart, aggressive and thoughtful. The yare the only company in the industry that dealers can sell to and hope to climb up and maybe run a region or large division. Their culture is very entrepreneurial. Founded by former HZO employees who disliked HZO’s culture and strategy. They almost never lose employees. They attract the best talent and then offer incentives and a culture such that no one leaves
LONG RUN EPS
I see a path to $10 to $15 in EPS in 4 years (FY Sep 2025), using the assumptions I laid out above plus MSD organic growth.
1) I am wrong about normal EPS
2) Competition enters and ROI on deals falls. Or they need to start doing very large deals and ROI falls
3) Recession led by high inflation and interest rates. Most boat purchases are financed. High interest rates can crush the industry. There is a tail risk that in a GFC like recession, they would get screwed on inventory and sales would suffer badly. WFC comprises literally 80% of the market for boat floorplan financing. They have tightened up terms. But this is a tail risk. Right now, given how lean inventories are, this is not going to happen. But in a few years things could change.
4) There will be a glut of used boats in a couple of years which will pressure margins on new boats
New boats sold are approximately 250k, ex watersports equipment. Up from 200k pre covid. that is a cumulative excess of 100k new boats sold over the last 2 years. Let’s call it 150k by the end of next year. If 50% of those new boaters churn off, that is 75k of new boats flooding the used market. say this happens over 1.5 years, 50k per year. The used boat market is 800k boats. 50k more boats will not be a game changer. In general, used boats have been in excess demand. Part of the reason the number of new boats has declined from 300k sold pre GFC to 200k pre covid, is that boat prices rose considerably. It was part of the industry’s strategy to capture higher profit customers and relegate cheap customers to the used market. I believe the industry could comfortably sell an extra 100k to 200k used boats a year.
If a glut of used boats causes new boat sales to fall, there will not be any excess inventory and writedowns. This is because current inventory is > 60% below normal and production is often presold for the next 12 months. There is plenty of visibility and slack in the channel to absorb more inventory without having a glut of new boats.
If I assume new boats fall 30%, used boats rise 10% and services remain unchanged, revenue will decline high teens. With 20% incremental margins on lost sales, EBITDA would fall 300 bps. EPS would not drop more than 50% at worst.
There are easy ways to hedge many of these risks. You can short HZO, a worse rollup of dealerships and marinas. I estimate they earn an 8% ROIC on deals. You can short the boat makers, BC, MCFT and MBUU. And you can short long term bonds to hedge against interest rate risk (TLT ETF).
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