It has been a very long time since I looked at shares of Malibu Boats (NASDAQ:MBUU), In fact, it was 2018 when Malibu made another splashing acquisition. In the more than five-year period which followed, shares have on a net basis showed little advancements, while Malibu has seen solid sales and earnings growth, reducing expectations dramatically with the passage of time.
While discretionary spending is under pressure, and 2024 will be a lot tougher, I am feeling quite upbeat here as valuations are anything but demanding here.
All About Discretionary & Recreational Spending
Malibu Boats is a manufacturer and distributor of recreational boats and related equipment and accessories. The has seen success on the back of increased discretionary spending, benefiting from a stronger economy and continued growth in the latter 2010s. The company furthermore benefited from focus on experiences over products or goods, as well as great interest for outdoor life and sports.
When reviewing its prospects in 2018, the company had reported sales for the fiscal year 2017 (which ended in the summer of 2017), a year in which the company generated $282 million in sales, derived from selling some 3,800 boats at an average selling price of $74,000 apiece. The production of these boats was quite lucrative, with EBITDA of $55 million translating into handsome margins, as was evident in a $30 million net profit number as well.
The company made a big deal that year with a $130 million purchase of Cobalt boats, a producer and distributor of so-called stern drive and outdoor boats, to add some $140 million in annual sales, adding roughly 50% to pro forma sales.
The impact of this deal and strong organic growth resulted in a massive growth acceleration in the first half of 2018. While the fiscal 2018 results were not yet reported at the time, a $500 million sales number and nearly $100 million EBITDA number were in the making. With 22 million shares trading at $40 per share, a resulting $900 million enterprise valuation (including a modest net debt load) looked fair at around 10 times EBITDA and 17 times adjusted earnings.
The momentum actually accelerated and gave management enough confidence to pursue another deal, as it acquired saltwater outboard fishing boat maker Pursuit Boats in another $100 million deal at the time, adding another $125 million in sales.
While the resulting valuation in the $40s were quite reasonable, given the growth and dealmaking efforts, I noted that the business was quite cyclical after all, as downturns in the economy are felt extra hard in such discretionary industries. This made me a bit cautious, as shares had seen a huge momentum run as well, of course.
Fast forwarding more than five years in time, shares of Malibu traded at $50, resulting in a very modest capital gains over this time period, all while the business has not paid out any dividend to its investors.
That is not to say that investors have had a relaxed time as shares fell back to the $30 mark in 2019 and after an initial scare reaction in the early innings of the pandemic, shares rallied to the $80s in 2021 as discretionary spending was lifting all boats, so to speak. What followed was a rather gradual decline to current levels at $50 per share.
Fast forwarding to the summer of 2022, the company posted a 31% increase in fiscal 2022 sales to $1.21 billion, although pricing played a major role in this with the number of units sold up 13% to 9,255 boats. These results came after an already much stronger 2021. EBITDA numbers rose in line with sales, in fact it increased a percent less, yet a $246 million EBITDA number revealed margins around 20%. Net earnings of $157 million worked down to an earnings number of $7.50 per share, as a share count of 21 million has actually come down a bit from the 2018 share tally.
Despite two very strong years already, Malibu guided for mid- to high single digit sales growth in 2023, although that EBITDA margins were expected to compress slightly, as retained earnings made that the net debt position has come down rather meaningfully.
In the fiscal year 2023, Malibu Boats reported a 14% increase in sales to $1.39 billion with pricing driven most of the sales advancements, as volumes rose by 6% and change. Sales growth was greater than initially anticipated, as a 15% increase in EBITDA actually made that margins expanded in the slightest way, contrary to slight margin pressure being anticipated. Reported net earnings of $103 million were down in a huge way due to a $100 million litigation settlement related to product liability, as otherwise earnings would have been up greatly as well.
The only negative is that fourth quarter sales growth slowed down to 5% and change, and while the litigation charge is a concern, net cash has risen to $78 million, which means that the litigation will not impact the financial viability of the business. That said, good times are not set to continue, with the company expecting mid-to high teens revenue declines and about 300-400 basis points in EBITDA margin pressure for 2024.
Trading at $50, valuations are dirt cheap, as earnings would have risen convincingly in 2023 (from a $7.50 per share earnings number in 2022) if not for the litigation charge. However, if we assume a 20% fall in 2024 sales on a $1.39 billion revenue base, revenues will fall to about $1.11 billion as 17% EBITDA margins (down 350 basis points) will work down to a $189 million EBITDA guidance, down nearly $100 million from the 2023 number.
That shortfall actually coincides with the litigation charge taken in 2023, which means that a $5 per share number reported in 2023 might actually be representative for 2024, with the hundred million shortfall “replacing” the litigation charge.
The shortfall is already seen in the first quarter results for 2024, as released in October. Sales fell 15% to $256 million on the back of a 24% decline in volumes, with EBITDA down 32% to $39 million (in what seasonally is a softer quarter). These results were softer than anticipated with sales now seen down in their high-teens, low-twenties, with EBITDA margins seen down 350-450 basis points. Net debt has reported at $20 million, after payment of the litigation charge.
What is very clear, given that no real capital gains have been seen in recent years, is that valuation multiples have compressed a great deal. Earnings power of around $2-$3 per share in 2018 has risen to $5 per share, and this comes as such earnings power is down meaningfully from 2023 levels already.
Clearly, cyclicality has been priced in as the company has seen continued sales growth, aided by the pandemic of course, but the company maintained its discipline and operates with a solid balance sheet. Trading at just 10 times earnings here, after earnings saw a big cut already (from an adjusted earnings number of around $9 per share in 2023), the situation looks a lot more compelling, even as the near term news flow will likely not be upbeat.
That said, there are some green shoots as well as the big fall in interest rates in the fourth quarter provides comfort to the luxury item/discretionary space and make equipment more affordable, potentially providing some tailwinds to the business. Given all this, now feels like a long term opportune time go pick up some shares here.