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When I first covered Malibu Boats (NASDAQ:MBUU) in September, I pointed out that the next two quarters might be rough for Malibu Boats, but the market already seemed to have that priced in as a near certainty. That’s basically how things have played out. Year-over-year earnings dropped nearly 38% despite a $0.09 EPS beat.
Bad guidance caused a temporary sharp drop, but I think my thesis that rough waters were already priced in was validated with a quick recovery. MBUU is trading nearly flat versus my last coverage, despite that relatively worst-case scenario.
Let’s take a look at some of the comments from the earnings call, as well as new projections, and make sure the original thesis still holds in light of all of the new information.
Malibu Boats Investment Thesis
In my original analysis of Malibu Boats, I found that the company was being valued similarly to pre-pandemic levels, despite a book value nearly three times as high. It had plenty of liquidity to get through a lawsuit settlement and a rough patch economically, a strong return on invested capital, and the potential to benefit from lower interest rates in 2024.
Overall, I believe the thesis holds. Let’s start with the fundamentals.
Malibu Boats Value Stock Fundamentals
Despite a tough macroeconomic picture, Malibu Boats increased its book value and tangible book value slightly. As a result, it’s still trading near recent lows in price-to-book value.
This is perhaps the best margin of safety for value investors to look at with Malibu Boats. The company remains profitable, the book value is increasing even in a down cycle, and the stock is trading at historical lows in price-to-book ratio. It’s no surprise that the recent dip was short-lived.
In addition, Malibu has paid down some debt, and maintains a low-debt balance sheet.
A look at the balance sheet does show that the current ratio has dipped a bit, to 1.82 from 1.95, but it’s still high enough to be confident in MBUU’s capitalization. Overall, the business is healthy, with plenty of liquidity and nothing troublesome on the balance sheet.
Long-term earnings growth (I look at the last decade) remains strong, especially after adjusting for the lawsuit, as mentioned in my previous coverage. Obviously, there is a pullback in earnings at the moment, and that is the main concern investors should have with MBUU.
The company projects revenue to be down more than 30% on the year, and worse than that in the third quarter. CFO Bruce Beckman delivered the bad news on the most recent earnings call.
“We anticipate a year-over-year decline in annual net sales ranging from a mid to high 30s percentage point decrease. We expect Q3 revenues to be down mid 40s percentage points.
Consolidated adjusted EBITDA margin is expected to decline 800 to 900 basis points for the year, with Q3 slightly below Q2 on a margin percentage basis.”
Later on during the call, Beckman assured analysts that guidance for the rest of 2024 is conservative, so they’re confident they can meet those numbers.
“I would say it’s a conservative guide. As you can imagine, we’ve had a lot of discussion on it. There is not any upside baked into the second half of the year for us. So that would be welcome certainly, but there’s nothing to say [indiscernible]. We believe that this, as we say, is conservative, and that if we see some positive tailwind, that it’ll be beneficial.”
While none of that is good news, it’s not out of line with what I expected – a likelihood of a couple more bad quarters, and then things starting to turn later in 2024. The company is going to remain profitable, and earnings estimates are in the $2.64 to $3.22 range for the fiscal year. So there should be no erosion in the book value, and thus the margin of safety should remain.
When it comes to rewarding shareholders, Malibu Boats still has a strong balance sheet and should take advantage of current lower prices by continuing to repurchase shares.
Risks and Headwinds for MBUU
The potential headwinds facing Malibu Boats remain the same going back to my initial coverage. The macroeconomic climate is the driving headwind. In particular, MBUU would like to see the Fed begin cutting rates. If they stay higher for longer, that’s going to slow down demand from Malibu’s customers.
Once rate cuts start, they should drive increased demand and Malibu’s earnings should start to rebound. Right now, the CME FedWatch markets are pricing a 99.6% chance of rate cuts by the end of the year. I do think that investors are a little bit too bullish on rate cuts, as I do think there’s more than a 0.4% chance that inflation is stubborn, and the rates stay higher for longer. That said, as a value investor, I don’t worry about timing those things.
Sooner or later, the rates will come down and demand will return. At that point, the upside for Malibu Boats should be realized by investors, and this position should pay off nicely. So the real risk here is a longer wait to realize the value.
Potential Growth Catalysts for MBUU
Most of the catalysts I wrote about previously remain, so I won’t be too detailed on the repeated catalysts. Obviously, the market is confident in rate cuts, and they would be a big catalyst. CEO Jack Springer said on the third quarter earnings call last year that he expects a bump in demand as a result of the replacement of boats destroyed in Hurricane Ian. I also believe that serving primarily affluent customers remains a long-term catalyst for Malibu Boats.
That takes care of the ongoing catalysts. An additional catalyst that I didn’t mention previously is the opportunities that could arise for Malibu Boats in a tough environment, with a strong balance sheet and a strong business that can adjust to demand. Those advantages over competitors offer potential in a tough cycle. While the slowdown is hurting short-term results, it may ultimately help MBUU.
If competitors fail, Malibu can increase market share. If companies struggle to maintain liquidity, Malibu could see opportunities for acquisitions.
CEO Jack Springer did not pull any punches on the recent earnings call when it came to the opportunities that could arise.
“We relish this environment. This is when we fine tune our model and we position for a strong recovery. We did it back in 2009 through 2011. Not only driving recovery, but capturing market share and exiting the downturn even stronger than before.”
Beckman said on the call that they’re waiting for an opportunity to arise to make an acquisition, “We are not able to dictate the timing of when those opportunities present themselves, but our strong balance sheet gives us the opportunity to move quickly when they do.”
Springer also cited the current conditions, “The market, with what we’re dealing with, I think that prompts potential sellers to come to the market.”
He said Malibu is paying a lot of attention to both pontoons and outboards, to expand into new categories.
Malibu Boats Valuation
This play may take a couple years, but there is significant upside for the patient value investor. As we can see, MBUU has traded at price-to-earnings ratios of 15 to 20 at numerous times, and price-to-book value has regularly exceeded 3.0.
Looking towards forward projections, analysts forecast earnings around $5.38 per share in 2026. At the aforementioned multiples, that would give us a target range of $81 to $108 to find an exit.
Even at the current book value of $31, a multiple of 3 would give a target price of $93 – right in the middle of that range. That doesn’t even account for growth in the book value, as the company remains profitable.
So if we stick with the $81 to $108 target range, that’s 70% to 127% upside over current prices. Of course, the end of fiscal year 2026 is two and a half years away, but that’s still an excellent annualized return that should beat the broader markets.
Conclusion
At the end of the day, I think this investment can be analyzed pretty simply. The margin of safety is tremendous at current prices. There are potential growth catalysts, and the company has a history of success. As long as earnings bounce back when the economy improves and rates drop, there is excellent upside potential for MBUU.
That makes this an asymmetrical bet, so I’m continuing to rate Malibu Boats a strong buy, and I’m maintaining my position.
