ONEW - OneWater Marine: Pressure On Profitability Resumes

2023-08-10 01:11:48 ET

Summary

• OneWater Marine's revenue increased by 4.5% YoY while operating margin decreased to 10.1%.
• The company has lowered guidance for 2023 (fiscal) due to lower prices for new boats.
• Based on the current valuation, my recommendation is Hold because I see no additional growth catalysts in the next quarters.

Introduction

Shares of OneWater Marine ( ONEW ) have fallen 6% YTD. Despite the fact that stocks are lower after the release of weak quarterly results and lower guidance, I believe that this is still not the best time to go long.

Investment thesis

In my personal opinion, in the coming quarters the company may continue to face pressure on both revenue growth and business operating margins. First, we may see a continued decline in new boat prices due to the post-COVID normalization trend. Second, I believe that there is very limited potential for financial improvement from reducing SGA spending. In addition, the current trade trends, demand recovery and exhibition sales results do not look optimistic. Thus, I do not see additional growth drivers for quotes in the next quarters.

Company overview

OneWater Marine sells new boats and pre-owned boats, spare parts and provides financial services to its clients. Currently, the company has 100 points of sale and 11 distribution centers. The company operates in the US market in 20 states.

3Q 2023 (fiscal) Earnings Review

The company reported worse than investors expected . The company's revenue increased by 4.5% YoY due to the growth in services, parts & other and pre-owned boat segments by 23.2% YoY and 13.5% YoY, respectively, however, revenue in the largest new boats segment, which accounts for 63% of total revenue, decreased by 1.4% YoY. You can see the details in the chart below.

Gross profit margin decreased from 32.3% in Q3 2022 (fiscal) to 26.8% in Q3 2023 (fiscal). The biggest contribution to the decrease in gross margin was made by the new boats segment, where the gross margin decreased from 27% to 20% due to the normalization of prices for new boats, and in the pre-owned boats segment, where the gross margin decreased from 30% to 22%. You can see the details in the chart below.

SGA spending (% of revenue) slightly increased from 15.4% in Q3 2022 (fiscal) to 15.6% in Q3 2023 (fiscal) due to higher marketing spending. Thus, operating margin decreased from 15.4% in Q3 2022 (fiscal) to 10.1% in Q3 2023 (fiscal). You can see the details in the chart below.

In addition, I would like to note that the company has lowered its guidance for 2023 (fiscal) both in terms of revenue and net income.

My expectations

I believe we may see continued pressure on both revenue growth and operating margins in the coming quarters. Firstly, despite the fact that the gross margin in the new boats segment has fallen solidly, profitability is still higher than in the pre-COVID period, so I believe that we can see a further decline in the gross margin in this segment, and the new boats segment accounts for more than half of total revenue.

Also, I'd like to note management's comment during the Earnings Call after the release of the results , where the company's CEO says we may see continued pressure on margins.

I mean, I would suspect that margins are going to deteriorate a little bit more and the hope would be that for us

In addition, I do not see the potential for a significant reduction in operating costs. On the one hand, I like the plans of management to reduce spending on SGA (% of revenue), however, on the other hand, if we look at the dynamics of spending on SGA (% of revenue), we will see that the current level of 15.6 % is quite low relative to historical data for the past 8 quarters, so I do not think that the optimization of administrative expenses can significantly support the consolidated margin.

Risks

Margin: a continued decline in new boat prices could lead to a decrease in the segment's gross margin, which could have a significant impact on the business' consolidated operating margin.

Macro (general risk): rising inflation and a decline in real incomes may lead to a reduction in consumer spending in the discretionary segment, which may have a negative impact on revenue growth in the future.

Drivers

M&A: the company is actively considering M&A opportunities in the market, so successful M&A deals at an attractive price can support the financial and operational performance of the business.

Valuation

Under P/E (fwd) and EV/EBITDA (fwd) multiples, the company trades at 6x and 8.7x, respectively, implying a discount to the sector median of around 63% and 12%, respectively. Despite the fact that the company's shares are currently priced relatively cheaply by multiples, I believe that investors should not make a buying decision based on a cheap valuation alone, because the shares can trade cheaply for a long period of time under conditions weak financial performance and lack of catalysts/drivers for growth.

Conclusion

In my personal opinion, the company's stock is currently undervalued by multiples, so I'm avoiding a Sell recommendation on the stock, however, I expect financial and operating performance to continue to be under pressure in the coming quarters due to price normalization on new boats and reduced demand, so my recommendation is Hold. I will continue to monitor the company's financials and will gladly change my recommendation if I see signs of a normalization in demand or an increase in the price of new boats.

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