ONEW - OneWater Marine: Challenging Quarters Are Coming

2023-11-15 02:41:24 ET

Summary

• OneWater Marine operates boat manufactures and dealerships with a strategy of constant dealership acquisitions.
• Analysts are anticipating a weak fourth quarter as sales are slowing down in the industry.
• The company has a significant amount of debt, leveraging shareholders' risks significantly in the currently challenging sales environment.
• Currently, the risk-to-reward seems modestly good as my DCF model estimates ONEW stock to be slightly undervalued, but not good enough for a buy rating as risks are very prevalent.

OneWater Marine ( ONEW ) manufactures boats and operates marine dealerships. The company’s strategy revolves around acquiring small dealerships and manufacturers. After heightened results during the pandemic, OneWater’s earnings have begun to fall despite further acquisitions as the pandemic effect has subsided and the macroeconomic state worsens. The company also has a significant amount of debt, leveraging shareholders’ position significantly. The current valuation of OneWater seems cautious, but seemingly for a good reason.

The Company & Stock

OneWater is a diversified marine company. The company manufactures and sells new as well as pre-owned boats, provides financing and insurance for the sold boats, and sells parts, accessories, and services for boats across 100 retail locations, 70 boat brands, and 50 boat manufacturers as of August . OneWater’s largest boat brands include Pursuit, Regal, Barletta, Sunseeker, and Everglades. Most of OneWater’s operations still come from new boat sales, representing around 55% of gross profit:

OneWater’s strategy revolves around dealership acquisitions. Recently, the company announced an acquisition of Harbor Pointe Marina in September, being one of numerous boat retailer acquisitions. OneWater tries to acquire dealerships with low EV/EBITDA multiples from small owners, and growing the acquisitions’ earnings through providing OneWater’s boat-, part- and financing resources, adding a more optimized distribution to the acquired dealerships.

The company went public just as the Covid pandemic started to spread in February of 2020. Since, the stock price has performed quite well with a total return of 46% at the time of writing, although the stock is very far from its record highs:

Financials

Due to the company’s constant acquisitions, OneWater has achieved a significant amount of growth. From FY2017 to trailing figures as of Q3/FY2023, the company’s compounded annual growth rate is 31.4%:

The growth mostly hasn’t been organic. In the mentioned period, OneWater’s cash acquisitions add up to $648 million with additional acquisition costs from equity financing – OneWater’s outstanding shares have gone up from a weighted average of 6.3 million in FY2020 into a current amount of 14.7 million. With a current enterprise value of $1.4 billion, the acquisitions count for most of OneWater’s current value.

As OneWater has acquired businesses, the company’s EBIT margin has simultaneously gone up from an EBIT margin of 4.9% in FY2017 into 13.5% in FY2022:

After FY2022, the margin has begun to fall as OneWater’s benefits from pandemic-boosted marine activity has gone down with a simultaneous fall in consumers’ faith in the macroeconomic state – currently, the trailing EBIT margin stands at 9.5%, with further decreases highly likely to come in coming quarters.

Upcoming Q4 Results

OneWater is going to report its Q4/FY2023 financial results on the 16 ^th of November. Analysts are expecting revenues of $422 million and a normalized EPS of $0.43, compared to previous year’s Q4 figures of $398 million in revenues and a normalized EPS of 1.40 – the revenues are estimated to have slight growth with an estimated increase of 6.2%. The previous year’s financials don’t include the entire figures of the Ocean Bio-Chem acquisition as well as the Harbor View Marine acquisition , though – organic performance is still expected to be poor for the company. The EPS estimate is way more dramatic than the conservatively estimated revenues – the EPS is estimated to drop by -69.3% as OneWater’s capacity isn’t going to be utilized very well in the quarter and fixed costs still need to be paid. In Q3, OneWater managed to grow revenues by 4.5%, although the EPS still fell by -51.8% in the quarter - a significantly larger amount of weakness seems to be expected in Q4 in terms of the EPS.

I believe that investors should remain cautious about OneWater’s upcoming Q4 results as well as following quarters. For example, OneWater’s competitor MarineMax (HZO) reported an EPS drop of -63.7% year-over-year in the same period as OneWater’s Q4, after an EPS decrease of -34.7% in the previous quarter; times seem to be getting worse in the industry.

Valuation

OneWater seems to constantly trade at low P/E multiples – currently, the forward P/E stands at 6.8, above the company’s three-year average of 5.8:

The P/E ratio alone doesn’t contextualize the valuation very well, as OneWater’s acquisitions and falling earnings make the evaluation quite difficult. To try to estimate the valuation in a more thorough way, I constructed a discounted cash flow model as usual.

In the model, I try to factor a low amount of acquisitions into the growth and cash flows. For FY2023, I estimate a growth of 9% due to past acquisitions, representing a performance that’s mostly in line with analysts for Q4. After the year, I estimate tough quarters to continue with revenue decreases of -3% in FY2024. From FY2025 forward, I estimate a growth of 6% that slows down in steps into a perpetual growth rate of 2%, with a cash flow conversion that improves as the growth slows down and acquisitions become more infrequent.

For OneWater’s EBIT margin, I believe that the FY2023 estimate of 8.4% is lower than the company’s long-term ability. I still estimate a further fall into 8.1% in FY2024 as a result of decreasing sales, but I estimate the EBIT margin to normalize afterwards – from FY2026 forward, I estimate an EBIT margin of 9.5%, which seems like a reasonable estimate for a long-term achievable level. The mentioned estimates along with a cost of capital of 12.76% craft the following DCF model with a fair value estimate of $28.42, around 16% above the stock price at the time of writing:

The used weighed average cost of capital is derived from a capital asset pricing model:

In Q3, OneWater had around $16.5 million in interest expenses. With the company’s current amount of interest-bearing debt, the company’s annualized interest rate comes up to 7.32%. OneWater leverages debt very aggressively compared to the market’s current equity valuation – in the long-term, I estimate a debt-to-equity ratio of 50%. The company has around $903 million in interest-bearing debts , around half of which are short-term borrowings.

On the cost of equity side, I use the United States’ 10-year bond yield of 4.64% as the risk-free rate. The equity risk premium of 5.91% is Professor Aswath Damodaran’s latest estimate for the United States, made in July. Yahoo Finance estimates OneWater’s beta at a figure of 2.52 ; marine sales are very cyclical in nature, and in addition OneWater’s operations are highly leveraged due to the company’s large amount of debt. Finally, I add a small liquidity premium of 0.5%, crafting a very high cost of equity of 20.03% and a WACC of 12.76%.

Takeaway

OneWater operates with a similar strategy as MarineMax, a company that I’ve previously done a write-up on with an outstanding buy rating. The company continues to acquire dealerships and other marine businesses to boost its top- and bottom line. Analysts aren’t anticipating a good upcoming fourth quarter as sales are slowing down in the industry – I believe that investors should be quite cautious as OneWater has a very large amount of debt. For the time being, I believe that the stock price constitutes a hold rating.

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