MCFT - Marine Products: Good Long-Term Prospects But Risks Outweigh Rewards In The Near Term

2023-10-10 14:00:16 ET

Summary

• Marine Products Corporation is a leading manufacturer of recreational fiberglass powerboats in the sport and fishing boat markets.
• The company faces challenges such as competition, barriers to purchase, interest rates, and environmental issues.
• Despite its strong revenue growth, the company is considered a 'Hold' due to the risks associated with the industry.

Introduction

Marine Products Corporation (MPX) is a leading manufacturer of recreational fiberglass powerboats in the sport and fishing boat markets. The company has two brands: Chaparral and Robalo. Chaparral offers sterndrive and outboard pleasure boats, while Robalo offers outboard sport fishing boats. Even if the company keeps experiencing a solid momentum in revenue growth, there are a few negative aspects to consider when investing in Marine Products. First, the company is cyclical, and its earnings can be volatile depending on the overall economy. Second, the company faces increasing competition from both domestic and international rivals. Third, the company is exposed to risks associated with the marine industry, such as weather events and changes in consumer spending habits. For that reason, I think, at the current price, Marine Products is a ‘Hold.’

Business Overview

Marine Products is a Delaware corporation that designs, manufactures, and sells recreational fiberglass powerboats in the sport and fishing boat markets. The company has two brands: Chaparral and Robalo. Chaparral offers sterndrive and outboard pleasure boats, while Robalo offers outboard sport fishing boats. Marine Products was founded in 2000 as a spin-off from RPC, Inc. The company has a long history of boatbuilding experience, with Chaparral founded in 1965 and Robalo in 1969.Marine Products sells its products to a network of 210 domestic and 88 international independent authorized dealers. The company aims to enhance its customers' boating experience by providing innovative powerboats. Marine Products is a leading manufacturer of recreational powerboats for sale to a broad range of consumers worldwide. The company's products are known for their exceptional quality and consumer value.

Competitive Landscape

Different kinds of boats compete for the same leisure time and money in the large boat industry. Regarding the type of material, the most used boats are aluminum boats, fiberglass boats, and, to a lesser extent, carbon fiber and polyethylene. Aluminum boats tend to be cheaper, require lower maintenance, and are lighter (easing maneuver), but corrosion may be a problem if there is a lack of proper care, and they are less stable than fiberglass boats, as they weigh less . Furthermore, fiberglass allows more complex hull designs, allowing fiberglass boats to have more accessories than aluminum ones. Regarding the type of boat, there are many recreational boats for different purposes, all competing with each other. Some popular categories are jetboats, sport, fishing, ski/wake, pontoon, etc. Moreover, the whole industry competes with other leisure activities for customers’ time and disposable income, making the substitute threat worrisome.

The recreational boat industry is highly fragmented (except for some segments like ski/wake boats), with many small private manufacturers and few large public manufacturers. Hence, the competition for customers and space on the dealer floor is tough. Furthermore, as big dealers, such as MarineMax (HZO) and OneWater ( ONEW ), increase their market share, they may enjoy better bargaining power toward manufacturers.

Manufacturers rely on the open-molding process to manufacture boats. This process is a manual labor-intensive manufacturing process; thus, I think it has a predominantly variable cost structure, limiting the benefits of operating leverage. However, according to Rob Parmentie r, when Larson and Glastron implemented robots in their boat production, the costs were 10% higher than with an open-molding process due to the small scale, even when the brands produced 20,000 models yearly. Consequently, the use of robots has been limited to certain companies and operations. Some companies, such as Yamaha and Brunswick (BC), have been using robots to automate production and improve quality control. Both companies have a larger scale than most companies, allowing them to justify their investment in robots. However, in its report 10K, Marine Products stated that its (and almost all fiberglass manufacturers’) manufacturing process still relies on labor-intensive processes. Marine Products and most of its US competitors are far from that production output, so it’ll be challenging to implement automation in the industry in the foreseeable future, even if the robotic experiments were carried out. Moreover, the number of powerboats sold decreased at a CAGR of -2.3% from 2018 to 2022. Consequently, I think the lower volume in the overall industry will make it harder to implement further automation.

Nevertheless, I believe that the larger scale of Marine Products will allow the business to incorporate automation faster than smaller competitors, giving it a cost structure advantage. From my perspective, the larger scale gives Marine Products wider access to financial resources, higher bargaining power, better brand recognition, and lower marketing expenses per unit.

However, Marine Products faces stiff competition from Brunswick Corporation. As the leader in the US market, Brunswick is a vertically integrated company that owns different brands and has a larger scale than Marine Products. Brunswick is committed to being an innovative leader with initiatives such as acquiring Freedom Boat Club, the ACES initiative, the awarded improvement in its Mercury engines, the Boateka marketplace, and the Business Acceleration segment. Consequently, Brunswick aims to expand its dominant position further and accumulate importance in the industry. For example, Mercury engines (one of the best engine brands ) are a crucial component for Marine Products boats; thus, Brunswick has a leverage bargaining position negotiating its engines in a fragmented market. However, Marine Products and other manufacturers are purchasing Mercury engines through the American Boatbuilders Association to get better prices from Brunswick, as the manufacturers concentrate a greater purchase power.

The success of the ACES initiative could benefit Brunswick’s boat brands first, improving its competitive position toward other boat brands with more antiquated technology. In this sense, the Boateka may decrease the need for new boat production, increasing the useful life of boats. Consequently, I think Brunswick has a more advantageous competitive position than Marine Products. However, the latest can focus on a niche market and keep its profitability. On this basis, I found Chaparral as a top brand on every review page that I consulted, so I think the company has a strong brand in the sterndrive boat segment.

Lastly, in my opinion, increasing vertical integration and scale of a few companies are raising the barriers to entry, as smaller competitors and new entrants do not benefit from economies of scale that greater purchasing power and efficiency grant.

Financial Performance

After 2020, Marine Products revenue growth accelerated, surpassing the growth rate of Brunswick, MasterCraft (MCFT), and Malibu (MBUU) in the first half of 2023. The units sold during 1H23 increased to 2521 from 2037 (23.76%), and the average selling price stood at $82.3 thousand from $74.2 thousand (9.7%) due to a favorable product mix (larger boats carry higher prices) and price increases to cover costs. The strong growth in the first half is surprising when companies like Brunswick recorded negative growth, and the annual growth of Malibu and MasterCraft were noticeably inferior. For instance, the number of units sold by MasterCraft decreased by 6.9% during 2023, while prices increased by 10.6%; in addition, the units sold by Malibu increased by 6.57%, and its prices increased by 7.24%. Even more surprising is that while MasterCraft and Malibu state that they are competing for dealers’ floors, as interest rates rise and inventories are relatively high, with more incentive, the CEO of Marine Products states that dealer demand remains high and inventory relatively low. It seems Marine Products is overcoming any challenge in the industry. In my view, this is a sign of the strong demand for Chaparral and Robalo boats in the market.

However, looking behind, Marine Products didn’t have any year where it surpassed the growth rate of all competitors. In fact, Malibu and MasterCraft were growing faster than the company by far.

Analyzing the profitability, the firm has a thin operating margin compared to Malibu and MasterCraft and a similar margin compared to Brunswick. However, since 2020, the operating margin has been increasing consistently but still far lower than competitors.

Please note that Malibu’s operating margin in 2023 was affected by the settlement of a liability. Adding back this expense, the operating margin was 17.63%.

Lastly, even if Marine Products hasn’t had the highest revenue growth and operating margin, it has consistently been the best capital allocator among the four companies since 2019. I believe the better return on investment is due to fewer acquisitions than the other three companies, so the management emphasizes organic growth over expensive acquisitions. Thus, lowering the probability of eroding value for shareholders.

Risks

Competition

As we saw above, Marine Products faces stiff competition inside the industry and outside through many leisure substitutes. Moreover, Brunswick is committed to innovating in many initiatives and with alarming power inside the industry due to its vertically integrated business.

Barriers to Purchase

During the pandemic , many new customers filled the market because people were looking for a safe outdoor activity, had plenty of time to learn about sailing, and had higher disposable income. However, consumers have less time and disposable income after the pandemic, as living costs soared. Thus, the cost of owning a boat has skyrocketed, making it hard for newcomers to prefer boats over any other leisure activity. This issue may be solved by initiatives like the Boeteka marketplace (offering cheaper preowned boats), boat clubs (such as Freedom Boat Club), and easier-to-drive boats.

Interest Rates

Dealers purchase new inventory using lines of credit, so higher interest rates make inventory more expensive. Moreover, some consumers acquire recreational boats by loans. Consequently, with higher interest rates, the demand almost surely has to fall, making the industry highly sensitive to changes in the business cycle.

Environmental Issues

The recreational boating industry has several environmental impacts, including water pollution, air pollution, noise pollution, habitat destruction, and wildlife disturbance. Dischargeable sewage and wastewater can cause these impacts: fuel and oil release, antifouling paints, and the noise and activity of recreational boats. All these impacts deter some people from buying a boat, making competing with other leisure industries more challenging.

Industry

Owing to the risks mentioned above and the worsening economic conditions (lower consumer confidence and higher interest rates), the National Marine Manufacturer Association ((NMMA)) estimates the number of units sold in 2022 and 2023 has decreased by 5% annually. Furthermore, it calculates a 3% annual growth until 2027 and a slighter increase of 1-2% until 2030.

However, MarketsandMarkets expects a CAGR of 7% in the North American Market until 2028. In this sense, Arizton estimates an annual growth of 8.69% until 2028. In addition, the global recreational boat market is expected to grow at a CAGR of around 5.1%-5.76%, according to Precedence and Allied Market Research . I believe the prices explain the vast difference between NMMA predictions and these research companies; there has been a tendency towards higher prices in the industry, so it’s plausible to expect further price increases.

In a nutshell, it’s not expected the industry will experience another boom, as it happened during the pandemic; moreover, a weaker economy (the end of the free-money decade) will reduce the growth in units sold, but higher prices may boost the growth in dollar terms.

Valuation

For my DCF analysis, I will use an annual growth rate of 5.25% since 2024, and the estimated sales for 2023 are $491,000 thousand. I consider the growth rate to be conservative based on different predictions from NMMA and research companies, as it’s lower than the expected growth in the US market. However, my model assumes that the sales in the second half of 2023 will keep their strong momentum and reach $491,000,000 a YoY increase of 28.87%.

The discount rate will be 17.25%, owing mainly to competition risk and macroeconomic condition risk. Moreover, I consider a Perpetuity Value of 15 and an EBIT margin of 12.39%.

Marine Products is a ‘Hold’ at $14 per share, as the margin of safety is not wide enough (>30%) to bring enough protection to investors from downside risks. However, the model is based on a slower-than-the-industry growth rate and an EBIT margin that is inferior to many competitors, as we saw before. If Marine Products improves its margins and/or grows faster than the market, the intrinsic value of its stocks can be significantly higher. Furthermore, acquisitions may increase the growth rate but could lower the ROIC if the company pays too much.

Conclusion

Marine Products is a leading manufacturer of recreational fiberglass powerboats, but it faces a number of challenges, including competition, barriers to purchase, interest rates, environmental issues, and a cyclical industry. Despite these challenges, Marine Products is a good investment for investors who are looking for a long-term investment in a leading recreational powerboat manufacturer. However, I would recommend a Hold rating on the stock now, as I believe the risks outweigh the potential rewards in the near term.

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