HZO - The Bottom Fishing Club: MarineMax

2023-11-27 06:03:59 ET

Summary

• MarineMax is a major U.S. seller of new and used boats, benefiting from increased wealth among affluent customers during the pandemic.
• The company caters to the full-service boat ownership experience, including financing, insurance, charter, marina, maintenance, and storage options.
• MarineMax stock is currently undervalued and presents an attractive investment opportunity, assuming a deep recession can be avoided.
• Technical momentum trends have been trying to reverse higher since October.

If a major recession can be avoided in 2024, one stock that could sail to big gains is MarineMax ( HZO ). The enterprise is one of the largest U.S. sellers of new and used boats, based in Florida, with 130 locations around the world. The upside of its business model, and to a degree its moat against competitors, is its full-service offerings, from charters & special events for its customers to boat/yacht maintenance options to marina parking and storage facilities. Its operations go well beyond a simple boat listing, dealership and financing design.

For sure, the company has benefited from the pandemic since 2020. The money printing scheme by the Federal Reserve to prop up the economy has directly led to increased wealth for the top 25% of income earners in America - MarineMax's affluent customer base. Soaring real estate and stock market wealth, on top of a desire to get away from cities (back to nature and wide-open spaces) have combined with intelligent management of the rising demand for boats/yachts to roughly double the size of the company since 2019 (increased sales at existing locations plus newly acquired dealerships, marinas, etc.)

Over the last several years of rising interest rates and faltering stock market gains, the watercraft and boat selling business has definitely begun to slow. Wall Street is aware of the downcycle potential at MarineMax, slashing the share price during 2022-23, from a high of $67 in 2021. However, the stock valuation today is incredibly low, discounting the negative effects of economic contraction in the U.S. to appear sooner or later.

What if we get a fabled and rare "soft landing" or just a minor recession in 2024? In this case, I envision HZO delivering well above average gains for investors, as boat sales/service sales remain strong, perhaps growing beyond current analyst projections. We may be getting close to a buy situation similar to the milder 2002 and 2020 recessions. Let's examine the investment story.

The Business

MarineMax is much more than just a boat dealership. 69% of total FY 2023 sales were related to new boat sales, 8% used boat transactions, with another 23% derived from owned marina, service/maintenance, boat storage, financing, and special events.

Below are screenshots from the company's website, explaining the full-service offerings outside of boat sales. Yachting resources, marina docking and related revenue, plus charter/vacation events fill out MarineMax's increasing focus on the high-end water travel service market.

An expanded breakdown of business operations is found in the Q4 2023 Investor Presentation . I have posted some slides below, summarizing and highlighting what investors own through HZO. At the end is a slide of the huge growth in operating results since 2019, just before the COVID pandemic hit.

Bargain Valuation?

My view is another decent period for sales during the upcoming calendar year could translate into better-than-expected profitability on MarineMax's integrated selling/service business model. From a supply/demand perspective, the number of immediate competitors continues to decline on industry consolidation trends, with HZO one of the upsized winners.

The company is already priced at a very attractive valuation, assuming flat operating results next year. Wall Street analysts remain relatively optimistic on fiscal 2024-26 operating results (ending each September), but the projections below could prove on the low side of reality absent a recession.

The investment buy logic is earnings and sales beat expectations, creating new investor interest and Wall Street attention on the undervaluation setup. It's easy to argue a trailing P/E of 6x, sales ratio of 0.28x, and valuation multiple on book value of 0.73x are cheap and attractive vs. S&P 500 index market "averages" at least three times the level of each reading. In addition, HZO is priced at valuation multiples around a 50% discount to 10-year averages, drawn below.

Even when we include heightened levels of debt and liability leverage on the balance sheet (after numerous acquisitions), MarineMax's enterprise valuations on core cash EBITDA generation (5.9x) or revenue (0.6x) are sitting well under decade averages.

Seeking Alpha's computer ranking system gives MarineMax an overall "A-" Valuation Grade . Compared to industry peers/competitors and the company's 5-year history, financial ratio analysis points to an inexpensive entry point today.

Technical Analysis

After the valuation checkup passes with flying colors, what about the current momentum trading picture? On the 18-month chart below, you can see MarineMax has been trying to bottom in price since October 2022. Selling pressure appears to have peaked in April, and a double-bottom formation between the spring and October of 2023 could support a price upmove soon.

I do like the fact that price is trying to get back above both its 50-day and 200-day moving averages in November. If HZO closes above $32 for a few days, momentum traders might start to pile into the stock.

Specifically, I am bullish on the reversal pattern outlined in recent weeks. The 14-day Relative Strength Index reached a clearly oversold level around $27 in October, mirroring previous short-term bottoms in price since 2022 (marked with blue circles). And, on Friday the 20-day Chaikin Money Flow indicator flipped into positive territory for the first time since early October (green arrow). If previous instances are repeated, some sort of tradeable jump in price may follow into the New Year.

I would also note that On Balance Volume has been rather strong since June (red arrow), which may be signaling sellers are disappearing in numbers.

Final Thoughts

The main risk owning MarineMax would be a deep recession, if flat to lower stock market and real estate wealth are coming next year. Under this bearish scenario, HZO may not rebound in price during 2024, instead likely decline dramatically. Why? Because a lower sales outlook crossed with extended leverage (vs. its 25-year history) on recent acquisitions would surely translate into significantly lower cash flow and income levels.

Given you are worried about an economic downturn, I understand if you want to sidestep a position in MarineMax.

In many respects (technical, fundamental, outlook without a recession), MarineMax is in a similar risk/reward investment position as my last article effort focused on Mosaic ( MOS ) here .

I am using the same investment plan with my HZO shares. I may sell half of my recently purchased stake, given a quick +10% or +15% gain in price. One risk-reduction trading strategies is to lock-in immediate gains on part of my position. This mathematically increases the odds of overall trading/investing success, as I would effectively slash the base purchase cost on the leftover smaller position (meaning HZO would have to fall -20% to -30% to generate a net loss on the whole transaction). So, if we do end up in recession during 2024, potential future losses would be somewhat muted.

I rate MarineMax shares a Buy , assuming a severe recession can be avoided. I do believe using a tight stop-sell order under $26 (about 10% below the current quote and near 52-week lows) is a wonderful way to potentially escape larger losses, in the event a recession is around the corner.

Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.

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