MarineMax: A Bull And A Bear Buy A Boat (NYSE:HZO)

Thesis

MarineMax, Inc. (NYSE:HZO) is a premium boating retailer that has taken advantage of the trends driven by COVID to grow revenue, market share, and strengthen their balance sheet. Unfortunately, this growth has not been rewarded as the share price has collapsed 46% over the past year to $31.38. HZO now sit with a P/E of 3.93 and a FWD P/E of 3.80 using the current mid-point of their 2023 guidance of $8.15 EPS. Despite their recent growth and low P/E, I believe HZO is a hold.

Boating is the best way to escape the stress of life, to create memories of a lifetime with family and friends. We are all United by Water. – Brett McGill, President & CEO

MarineMax, Inc.

With over 120 location, 44 premium brands, and 57 Marinas with 12,500 slips, MarineMax is a premium recreation boating, yachting, and superyacht retailer. They offer new/used boat sales, accessories, financing, and service. They also fully own and manufacture two boat brands, Cruiser Yachts, and Intrepid Powerboats. On the yachting side, they offer charters and MarineMax Vacations, as well as broker superyacht sales and service.

The Boating Market

The COVID lockdowns of early 2020 have kicked off several beneficial trends for the boating industry. Demand skyrocketed as people adjusted to lockdowns and looked for safe, outdoor activities. As inventory rapidly depleted, supply chains were also struggling from multiple issues including sourcing materials and employees. For retailers, this high demand mixed with low inventory has allowed margins to rapidly increase.

MarineMax also kicked off a strategy to move into higher margin products. In 2022, HZO’s average selling price for a new boat was $256,000, which is an increase from 2021’s average price of $227,000. These values are compared to an industry average of $71,000. The push to higher-priced, higher-margin products is about to serve HZO well as we enter 2023. With lockdowns lifted and supply chains improving, some of the boating trends of the last few years are beginning to reverse, but primarily in the value products.

Customer deposits grew 43% year-over-year, to a new September quarter record of $144 million. They also increased sequentially from the June quarter. This is particularly noteworthy, and speaks again to the premium nature of the products we offer, as well as the resiliency of the premium buyer. – Mike McLamb, MarineMax, Inc. (HZO) Q4 2022 Earnings Call Transcript.

Despite some of these trend reversals, the boating industry is still expected to grow with CAGR estimates ranging from 6.5% to 7.5% continuing to 2027. This growth will just add to the growth the industry has already seen hitting retail sales of $49.4 billion in 2020 and $56.7 billion in retail sales in 2021.

Growth and Business Strategy

Since the 2008 financial crisis, MarineMax has been steadily growing revenue. The total revenue (TTM) trend below shows this rise from 2008 and then the rapid growth beginning in 2020. While the COVID trends have helped lift the entire boating industry, MarineMax has been strengthening the company and adding to their growth using several strategies.

As previously mentioned, MarineMax has been expanding into premium products that command a higher price and higher margin. Their latest acquisitions of IGY Marinas adds a recurring revenue stream that is expected to be $100MM. With marina gross margins typically mid-60% to low 70%, this acquisition continues to increase HZO’s overall margins. On the digital side, they have Boatyard, a customer experience platform, as well as websites that provide virtual access to most products including boats, yachts, and charters.

As we enter 2023, MarineMax’s M&A activity will likely remain their most impactful strategy. It is an area that they have significant experience in having completed 49 acquisitions since their inception. This strategy will likely continue to work well as the boating market remains highly fragmented with many independently operated locations. HZO can acquire smaller companies and integrate them into their larger brand. The new acquired companies will suddenly have access to more resource, a larger brand, and new products. This is very similar to OneWater Marine (ONEW) M&A growth strategy, which I have discussed in previous articles, with OneWater focusing on being the “acquirer of choice” for independent retailers.

Gross Margin

HZO’s gross margins have clearly grown through the COVID-driven trends combined with HZO’s push to higher margin products. As we enter 2023, some trends are starting to reverse. Inventory is recovering in the value segment, and demand there is softening. Despite this trend, HZO’s management is still expecting mid-30s gross margin as premium products still have shortages and high demand. During the Q4 earnings call, Mike McLamb estimated around 1/3 of the margin growth is from price increases. Since margins moved from roughly 25% to 35%, that means a return to normal prices could drop margins to the low 30s.

As these trends continue to shift and the economy cycles continue, these strategic changes become more important to the long-term strength of HZO:

We are a different business today versus past economic cycles. Our mix of revenue has shifted to a more premium, more exclusive tier and we have greater control over our markets that have historically low inventory levels. We have over 120 locations worldwide and collectively with the IGY acquisition, we own or operate 57 marinas, driving more recurring revenue with higher margins. We have industry-leading technology and digital tools, driving new customer engagement, greater experiences for our customers and strategic high-margin growth. Simply put, our business model is more resilient and diversified. – Brett McGill, MarineMax, Inc. (HZO) Q4 2022 Earnings Call Transcript

Guidance

For FY2023 MarineMax has guided to an EPS range of $7.90 – $8.40, including the acquired IGY Marinas, and are expecting same store sales to be flat. This range is below their recent 2022 full year EPS of $8.84. HZO’s management mentioned the overall industry is expected to see a decline in units sold, potentially back to 2017 unit sales levels. This decline is partly softening in demand in the value units as well as continued inventory challenges. With MarineMax’s change in product mix, we can always hope for a surprise, which HZO has been able to deliver:

Shrinking Share Count

MarineMax has never paid a dividend, instead using their excess capital to expand the company and repurchase shares. Their share repurchase programs have repurchased over 7MM shares. The current repurchase program is authorized to repurchase 10 MM share by 2024, and still has 8MM share remaining for repurchase. These repurchase programs have reduced the outstanding share count by 10.7% since 2016. When properly executed, these programs are a great way to return capital to investors, by continually shrinking the outstanding share and rewarding you with increased ownership.

Share counts must be monitored though as HZO does have programs that continually push shares back to the market including an employee stock purchase program, stock options, and stock-based compensation. It’s very possible for companies to have a stock repurchase program while maintaining their share count or even growing share count.

The Bear Takes a Swing – Return to Normal and Recession

Over the last year, share prices across the boating industry have been driven down for good reason. The high demand, low inventory, and sky-high margins driven by COVID are not going to last. In fact, the industry is already starting to see some of these shifts happen as inventory rises. Companies are seeing it in the value products, and it will slowly move up the chain. Eventually inventory will return, and prices will stabilize. This is the return to mean that we should expect.

In addition to this return to normal, the economy faces many challenges with high inflation, war in Ukraine, supply chain issues, employee shortages, and rising interest rates. Investors are regularly seeing news about the risk of a recession in 2023 and a recession will absolutely impact the boating industry.

Entering 2023, households across the US are getting pinched by inflation. Once again, consumer debt and credit card debt are on the rise. The healthy increase in personal savings rate seen during the early days of COVID has fully reversed and is now at one of its lowest levels. These struggles have dropped consumer confidence and consumer sentiment to levels close to 2008. These trends do not appear to line up with the employee shortages and record low unemployment we are experiencing, but these low employment numbers are driven by discouraged workers, low paying jobs, and reduced labor force participation.

We can look back at the 2008 financial crisis for what a deep recession can do to HZO. In the chart below, US boat sales are shown peaking in 2006 and 5 years later they had been cut in half. While the decline in sales took many years and an investor may think they can sell when they see a decline, know that HZO’s stock price declined faster than this sales trend, bottoming in 2009.

MarineMax’s EPS also dropped deep into the negative during the financial crisis and remained at suppressed levels for many years. Their share price also dropped below $2.00 and did not reach the previous highs until 2020.

Conclusion

2020 brought powerful trends that lifted the boating industry like a high tide (sorry). The bulls can look at MarineMax, Inc. and see great things. The business is bringing in record high revenue, expanding with acquisitions, spitting out high EPS, buying back shares, and strengthening their balance sheet. With their push into premium products that carry a higher margin and continue to have inventory shortages, bulls see a company that is well situated to handle a recession in 2023.

The bears see an extremely discretionary industry knowing these high margins and prices will eventually reverse. The economy feels in rough shape as inflation continues to eat away at people’s income and interest rates keep going up. If things continue to be tough, people will drop boats faster than other necessary items like food, housing, and cars.

For myself, I have similar feelings toward HZO as I do ONEW. I really like their M&A strategy for a fragmented market like retail boating. HZO has built a well operating company with a solid balance sheet and low long-term debt.

If you want to invest in the boating industry, MarineMax, Inc. is one of the top choices, but given the current consumer sentiment, potential for the boating industry to return to the mean, and economic risks, I do not feel a rush to jump into HZO. For myself, I believe it is a hold. I plan to watch HZO to see if their share price continues to decline, how demand changes in the boating industry, and monitor the risks of a recession in 2023. A mild recession that minimally impacts the premium price sector could allow us to pick up MarineMax, Inc. shares cheap before a recovery.