MCFT - MasterCraft: High ROIC And Solid Fundamentals Point To Upside Potential

Summary

• MCFT has a high ROIC, outstanding fundamentals, and a strong history of double-digit growth in key metrics.
• Despite its solid performance, MCFT's stock has been volatile and has not trended higher in recent years.
• With above-average EBITDA margin guidance and the potential to catch up to its historical multiple of 8.6x EV/EBITDA, MCFT's stock price could exceed $50, offering significant upside potential for investors.

Introduction

MasterCraft Boat Holdings, Inc. (MCFT) recently reported strong financial results for the quarter, posting net sales of $159.2 million, a 10.2% increase year-over-year. The increase in net sales was primarily due to higher prices, partially offset by slightly lower unit sales volume and higher dealer incentives. Operating expenses for the quarter were $11.8 million, or 140 basis points lower as a percentage of net sales compared to the prior year. Adjusted income for the last quarter increased 11% to $21.3 million or $1.20 per share. The company also reported record cash flow from operations and free cash flow due to strong earnings and favorable working capital management.

The company's balance sheet remains strong, with nearly $190 million of total liquidity, including nearly $90 million of cash and short-term investments and $100 million of availability under the revolving credit facility. Given the company's recent operating performance, strong balance sheet, and positive long-term outlook, MasterCraft believes its stock represents an outstanding value at recent prices.

The company also announced in mid 2022 that it has discontinued operations from the NauticStar segment, which accounted for more than 10% of MasterCraft's sales but was producing losses. The sale of the NauticStar business to Iconic Marine Group is expected to better position MasterCraft to drive profitable growth, with a focus on the MasterCraft, Crest, and Aviara brands.

Looking ahead, MasterCraft is raising its guidance for the full year based on strong performance and incremental retail demand visibility. The company expects consolidated net sales for the full year to be between $620 million and $640 million, with adjusted EBITDA between $111 million and $118 million, and adjusted earnings per share of between $4.40 and $4.66. The company remains confident in delivering strong financial results for its shareholders, despite the dynamic business environment and macroeconomic uncertainties.

Investment Thesis:

Considering the cyclical nature of this business and its vulnerability to macroeconomic conditions, particularly interest rates, I am examining whether its current valuation justifies a long-term investment. Based on historical data, this business has typically been valued at an average EV/EBITDA multiple of 8.6. However, as of the latest finical metrics and cash positions, the EV/EBITDA multiple has compressed to an all-time low of 4.2 TTM. This can be attributed to three factors: a recent surge in the cash position, a record EBITDA, and a stagnant stock price that has not appreciated significantly in the last five years, staying below its all-time high of $38 in 2018.

Price Target:

Based on the latest guidance provided by Mr. Oxley, the CFO, in the earnings call (as mentioned above), MasterCraft is expected to have lower revenue but similar EBITDA compared to the previous fiscal year. Additionally, the company is expected to have an above-average EBITDA margin of 18%, which is higher than the 10-year average of 14%. Before estimating a fair price target for the stock, it is important to consider the company's ROIC, which is exceptional at 72% (chart below: currently well above average, but for all the past 10 years the metric has been above 20%) due to its efficient use of capital, despite operating with very little capital, and a significant portion of it being intangibles. Moreover, the company has had consistent double-digit growth in revenue, EBITDA, and free cash flow for the past decade. Despite this impressive performance, the market has not been giving the company enough credit, as the stock price has been volatile and has not trended higher over the past five years. At a current EV/EBITDA multiple of 4.2, the stock is trading well below its historic average of 8.6. Utilizing the guidance provided, a fair price target for the stock can be estimated to be above $50 per share, which implies an EBITDA of $114 * 8.6 (historic multiple) = enterprise value of $980 million plus cash ($90 million) minus debt ($57 million) equals to $1.013 billion of market cap (divided by 18 million shares = $56 per share).

Risks:

Regarding the fact that MasterCraft has not been paying dividends, this can be seen as a disadvantage for income-seeking investors who prefer regular cash payouts. On the other hand, this also means that the company can reinvest profits back into the business to drive growth, which can benefit long-term shareholders.

As for the special dividend paid in 2016, it's not uncommon for companies to distribute special dividends when they have excess cash on hand. However, it's important to note that this can be a one-time event and may not be indicative of ongoing dividend payments. Additionally this special dividend was distributed shortly after the IPO where MasterCraft raised considerable amount of cash. Which in turn got partially distributed the year later in the form of the special dividend, I find this practice rather peculiar.

Cyclical stocks, like MasterCraft, are subject to fluctuations in their industries and can experience significant declines during economic downturns. This means that the company's financial performance is dependent on factors beyond its control, such as consumer demand and industry trends. Additionally, supply chain challenges can also pose a risk to the company's operations and financial performance. This includes disruptions in the availability of raw materials or the ability to distribute products, which can lead to increased costs and lower revenues. It's important for investors to consider these risks when evaluating the potential of the company's stock.

Conclusion:

In conclusion, MasterCraft Boat Holdings is a company with a solid financial track record, boasting impressive returns on invested capital and consistent growth across metrics over the past decade. The company's stock price has remained volatile and hasn't reflected its strong fundamentals in the past 5 years. However, based on the company's historical multiples and current guidance, there is potential for the stock to catch up to its true value, with an estimated fair price target of over $50 per share.

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