Marine Products: Stock Still Offers Upside, But Not The Best (NYSE:MPX)

Boat racing across a lake with wake behind it, green trees in the background, and clouds in the sky

Brian Koellish

Despite fears about a recession, it’s undeniable that the marine space has been particularly strong. One great example of this strength can be seen by looking at Marine Products Corporation (NYSE:MPX), a company that serves as a market leader in the recreational power boat space in the US. Even through the latest quarter this year, management has done well to grow the company’s top and bottom lines. On top of that, shares look quite cheap on an absolute basis, even though they are pricey relative to similar firms. At the end of the day, I would make the case that shares probably have additional upside potential from here. But I also believe that there probably are better prospects in this category to consider buying into.

Cruising along

Back in early April this year, I wrote an article that looked upon Marine Products in a favorable light. In that article, I stated that the company’s revenue and profit picture had been looking good through the end of its 2021 fiscal year. Unfortunately, up to that point, the market had failed to reward the firm. At the end of the day, however, I concluded that the company likely warranted some upside potential even though it wasn’t the greatest prospect to be had. Because of all of this, I ended up rating the company a ‘buy’, reflecting my belief that it would likely outperform the broader market for the foreseeable future. Fast forward to today, and my call has so far proven accurate. While the S&P 500 has dropped by 5.5%, shares of Marine Products have generated a return for investors of 1.6%. Although this return is not significant, it does capture the sentiment of what I conveyed when I rated the company a ‘buy’ previously.

Historical Financials

Author – SEC EDGAR Data

This relative performance has not been without cause. In fact, it has been based on strong fundamental performance achieved by management. Consider how the company fared in the latest quarter, which is the second quarter of its 2022 fiscal year. Sales came in strong at $95.8 million. That represents an increase of 42.3% over the $67.3 million generated the same quarter one year earlier. At the end of the day, there really were two key contributors to this increase. First and foremost, the company saw the number of boats sold increase by 15% year over year, rising from 975 to 1,121. In addition to that, the company also benefited from the average gross selling price per boat rising from $61,300 to $74,900. That translates to a year-over-year increase of 22.2%.

This rise in revenue brought with it strong profits for the enterprise. Net income, for instance, came in at $10 million for the quarter. That’s almost double the $5.8 million generated just one year earlier. Much of this improvement came from a mixture of increased revenue and from improved margins. Its cost of goods sold fell from 78.3% of sales to 76%, while selling, general, and administrative expenses declined from 10.8% of sales to 10.3%. Although these differences may not seem significant, they do add up. Based on the company’s revenue for the quarter, these two improvements alone translated to nearly $2.7 million in additional operating profit for the enterprise. That’s nearly half of the operating profit improvement company sold during that quarter. Naturally, this had a positive impact on other profitability metrics. Operating cash flow turned from negative $2 million to positive $12.7 million. If we adjust for changes in working capital, it still would have risen from $6.5 million to $9.8 million. Meanwhile, EBITDA for the company also improved, climbing from $7.8 million to $13.6 million.

Historical Financials

Author – SEC EDGAR Data

This strong second quarter helped improve the company’s financial performance for the first half of the year as a whole. Revenue rose by 18.4% from $145.6 million to $172.4 million. Net income increased from $13.9 million to $17 million. Operating cash flow nearly tripled from $6.1 million to $17.2 million. Though if we adjust for changes in working capital, the increase would have been more modest from $15.8 million to $18.4 million. Over that same window of time, EBITDA for the firm also improved, rising from $18.3 million to $23.2 million.

Unfortunately, management has not really provided any significant guidance for the current fiscal year. If we simply annualize results seen for the first half of the year, we would anticipate net income of $35.5 million, adjusted operating cash flow of $38.4 million, and EBITDA of $48.4 million. These numbers compare favorably to the $29 million, $33 million, and $38.2 million, respectively, that the company generated in 2021. Using these figures, we can easily value the firm. On a forward price-to-earnings basis, the firm is trading at a multiple of 11.3. This compares to the 13.8 reading that we get using 2021 figures. The price to adjusted operating cash flow multiples should be 10.4. That’s down from the 12.1 figure we get using last year’s results. Meanwhile, the EV to EBITDA multiple should drop from 9.9 using 2021 results to 7.8 using forward estimates.

Trading Multiples

Author – SEC EDGAR Data

As part of my analysis, I also compared the company to five similar boating firms. On a price-to-earnings basis, these companies ranged between a low of 4.9 and a high of 64.6. This assumes the forward multiples apply, not the 2021 figures. In this case, four of the five companies were cheaper than Marine Products. Using the price to operating cash flow approach, only four of the five companies had positive results, with their multiples ranging between 5.3 and 9.5. The same thing applies to the EV to EBITDA approach, with the multiples of the four firms ranging between 3.2 and 7.7. And in both cases, our prospect was the most expensive of the group.

Company Price / Earnings Price / Operating Cash Flow EV / EBITDA
Marine Products Corporation 11.3 10.4 7.8
Malibu Boats (MBUU) 9.8 9.1 6.5
Brunswick (BC) 10.6 6.9 7.7
MarineMax (HZO) 4.9 5.3 3.2
MasterCraft Boat Holdings (MCFT) 6.6 9.5 4.5
Twin Vee Powercats (VEEE) 64.6 N/A N/A

Takeaway

Fundamentally speaking, Marine Products is doing a fantastic job right now. Unfortunately, it’s unclear just how much longer strength in this space will continue. Long term, I fully suspect the company will be just fine. After all, it has $21.57 million in cash and no debt on hand. I also think that shares are cheap on an absolute basis. But relative to similar firms, there’s no denying that shares are a bit lofty. Ultimately, I still view a ‘buy’ rating on the company as being appropriate, but I do think that there are more appealing opportunities in this space for investors to keep in mind.

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