Summary
- MarineMax has posted record results over the past twelve months. The share price is unrewarded as it trades 50% lower than a year ago.
- The company makes continuous strategic acquisitions in a fragmented market. It maintains strong revenue growth and improves margins.
- It uses buyback programs to opportunistically repurchase shares.
- I expect a bounce in 2023 as higher recurring revenues improve the risk-reward profile. A return to normal multiples could more than double the share price.
MarineMax ( HZO ) posted stellar results and recently announced an accretive acquisition. The company has a long history of compounding value. It has a strong balance sheet and increased its margins over the past couple of years.
MarineMax's stock price tells a fairly different story than its financial results. It grew its revenues steadily both organically and organically. It regularly acquires small businesses to expand its footprint and revenues. The fragmented market offers ample opportunity to reïnvest cash profitably with these acquisitions.
The recent margin expansion finally moved the share price higher as well. As I'll show later, its valuation is still very cheap and below its average over the past 10 years.
The stock is currently priced for a 2008-type recession where wealthy customers also took big hits.
2023 Bull Case For MarineMax
My bull case for MarineMax is 2023 is simple. The company generates results in line with expectations: slightly higher revenues and lower EPS. It generates significantly more recurring revenues which improve the risk-reward profile. Buybacks should support the share price during the economic rough sea in the first half of 2023.
As investors recognize the increased stability and solid results, the valuation can recover to a more normal level. For me, this is PE 10. At the midrange of its guidance ($8.15), this translates to a share price of $81.5. Even if it just reaches PE 8, it could double and reach a share price of $65.2.
My Selection Method For Long-Term Winners
I always look for strong growth stocks with high free cash flows and regular shareholder returns. These stocks often provide good long-term results when bought at the right price.
An overview of my recent articles with similar stocks:
- 4 Growth Stocks To Buy As Inflation Cools
- 4 Stocks To Buy And Hold During The Selloff
- 3 Hidden-Gem Stocks To Buy And Hold
- 10 Stocks To Buy And Hold Forever
Growth
MarineMax's most recent fiscal year ended on September 30 with stellar results. Overall revenue growth of 12% came from acquisitions and a 5% increase in same-store sales. Excluding hurricane Ian's expenses, net income per share increased a whopping 30% to $9.
MarineMax showed steady revenue growth for a long time. Its revenues increased by 13.3% CAGR from 2013 until 2019.
The reopening after corona temporarily even increased growth. It could keep a strong pace after corona as well.
MarineMax
The company regularly acquires complementary businesses. It's a fragmented market with a lot more growth potential. The company signals it wants to continue its expansion path.
Future Growth
Near-term growth is already assured with its acquisition of IGY Marinas. It adds 23 marinas to its network. The services of these marinas generate recurring income at high margins. The company is expected to contribute $100M in recurring revenues in 2023.
It just acquired Midcoast Construction Enterprises which further builds on the marina expertise. The addition of a marine development company is a sign of more marinas to be added and the expansion of current marinas.
The company didn't provide revenue guidance but expects lower EPS in 2023. The worsening economic environment will probably affect its business.
Margins
MarineMax expanded its margins nicely and expects to keep higher margins than before 2020. The company focuses on a high net worth resilient customer base. The high end of the market probably keeps more firepower for its products as they aren't as much affected by inflation. There also isn't any promotional activity for these products.
The addition of more marinas also helps to keep the higher margins as they often operate at 60-70% gross margins. The company improved its overall margin profile with its acquisitions as it pointed out on the latest earnings call .
Free Cash Flow
Free cash flow is vital as this is what a company could use for shareholder returns. Potential buybacks or dividends are only possible if the company produces enough cash.
Free cash flow slowly evolved positively before Covid and then spiked as it could sell out inventory at good prices. HZO recently rebuild its inventory and kept a positive free cash flow. As inventory stabilizes, it should be able to generate decent free cash flows.
Shareholder Returns
Buybacks and/or dividends are signs of shareholder-friendly management.
MarineMax only returns cash to shareholders when it has excess free cash flows. It uses buyback programs to return cash to shareholders.
It doesn't pay a dividend and a dividend seems unlikely in the near future. The company uses its cash for acquisitions and occasional buybacks. I don't expect steady returns in the future, but opportunistic buyback programs like it did over the past seven years.
Balance Sheet
Recent strong demand boosted MarineMax's free cash flow and its cash position. It went to a net positive cash position.
The financial position changed drastically with the acquisition of IGY Marinas. HZO paid $480M for the acquisition with a mix of cash and additional debt. Debt remains reasonable in comparison to EBITDA. Net debt to EBITDA remains below 1 after the acquisition.
Valuation
I mentioned a recovery in multiples as one of the reasons for my bullish view of MarineMax in 2023. The past valuation shows this is certainly possible.
MarineMax trades at the lowest PE ratio in years after its record fiscal 2022. Other metrics like the PS ratio also show the company is cheaply valued. The market overestimates the risks for MarineMax and ignores the changes.
Risks
A hard recession that also hits wealthy people could harshly affect MarineMax's revenue and profitability. Especially sales of new vehicles are vulnerable in such a scenario and these sales make up most of the revenue (70%). The company took a big hit from 2007-2011.
It lost a lot of clients during the great recession and it only reached its 2007 revenue again in 2019. The stock price reacted accordingly during this time:
I don't expect a similar recession as in 2008. The post-pandemic travel trends support the investment case in MarineMax. The company also becomes less dependent on sales and creates more recurring revenues with its services.
Conclusion
An investment in HZO is primarily a belief in the expansion strategy of the company. It's a serial acquirer with a lot of experience and past success. Acquisitions come first and shareholder returns come second for the management of HZO.
The stock price hasn't followed the results at all in the past. The steady revenue growth for more than a decade looks promising. Improved gross margins make it an attractive company, especially as they don't come from one-offs only. The company's margin profile improved with strategic acquisitions.
The near-term uncertainty about the state of the economy presents a buying opportunity for MarineMax. It trades at really low ratios that will only drop further if a 2008-style recession follows.
Editor's Note: This article was submitted as part of Seeking Alpha’s Top 2023 Pick competition, which runs through December 25. This competition is open to all users and contributors; click here to find out more and submit your article today!
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MarineMax Sails To A Bright Future: Top Pick For 2023