I never thought I would be highlighting a boating company, but Malibu Boats Inc. (MBUU, Financial) is different.
The company has a rich history as a prominent player in the performance sport boats market, and has expanded its footprint into the sterndrive and saltwater segments through strategic acquisitions in recent years, managing to maintain its market dominance. The fortunes of this sector have historically been closely tied to the broader economy as products and services are generally seen as discretionary purchases, but with more than 3 million baby boomers reaching retirement age every year, the ability to find customers is never better.
The world’s best wake boat
In 1982, a group of six friends from California who loved water skiing started to build ski boats. Over time, they achieved a series of industry firsts, including:
- The pioneering Wakeboard Hull.
- The innovative Wedge Hydrofoil, succeeded by the Power Wedge II.
- The game-changing Surf Gate, which sparked a revolution in watersports by creating a continuous, controllable surf wave.
Malibu's boats are used for water sports, including water skiing, wakeboarding and wake surfing, as well as general recreational boating. It has a portfolio of eight brands, including names like Malibu, Axis, Pursuit, Cobalt and Maverick. The retail price bracket for the company's boats is quite extensive, usually falling anywhere between $60,000 and $800,000.
The company holds patents on a number of proprietary innovations, including the Surf Gate and Power Wedge technologies, both of which are key to its success with the wake-sport enthusiasts. The modular construction of the boats allows it to increase offerings without adding substantial cost to production, while the patents on the high-tech, high-margin innovations prevent imitation. Plus, with the recreational boat market currently valued at $33 billion and expected to climb to more than $50 billion by the end of the decade, Malibu has continued to grow its market share.
Growth through acquisitions
Going forward, Malibu is looking to grow via strategic acquisitions. The addition of Cobalt, Pursuit and Maverick within the last five years has provided robust sales growth (averaging nearly 40%) thanks to a strategy based on fit and the ability to raise shareholder value.
As a result, the company could roll up with a new buy every other year in the $100 million to $150 million price range, providing United Rentals-like growth potential. While such transactions would drive sales growth, Malibu still has a strong ability to maintain consumer interest in its legacy brands as well.
By the numbers
Based on a history of financial performance and nothing else, the company looks extremely attractive. No one can dispute the incredible success Malibu Boats has achieved across its financial statements.
Revenue has increased from $167 million in 2013 to $281 million in 2017 to $1.2 billion in 2022. Profits did even better, with the company going from a net loss to a $28 million profit in 2017 and a $157 million profit last year. Retained earnings have also gone from red to black with the company booking more than $543 million since 2017.
That being said, the number that matters most is that five of every 10 towboats sold worldwide were produced by Malibu. The company's boats are hand-crafted by a team of over 700 leading innovators, designers, craftsman and boaters. It would be fair to say any newcomer would find it hard to compete.
Ratios and margins
Looking solely at the company’s profit margin, Malibu Boats is squeezing out all it can. With a gross margin around 25%, the company is able to push nearly half that to the bottom line with a net margin of about 12%. That says a lot about management. In 2013, the operating margin was 11%; today, it is nearly 500 basis points higher.
This translates to extremely impressive returns on equity (approximately 30%), returns on assets (20%) and returns on total capital (23%), which together make it an elite company. More importantly, most of its capital expenditure is attributable to performance, not maintenance, and there the company only spends about 5% of sales.
Future potential
The company has surpassed earnings expectations in every quarter since 2018 and only missed on revenue once over the same period. This shows a conservative approach to projections and an impressive track record for outperformance.
With the launch of its M220 model that has features of a sport boat and a wakesurfing boat, Malibu has taken a step toward a different customer segment. While it likely will never break into the yacht market, the company continues to increase its presence in emerging markets such as China, India and Brazil, where recreational boating and water sports are in high demand.
Bottom line
Malibu Boats is a niche market leader trading at a 50% discount to its historic GAAP price-earnings ratio. Not only is the industry still growing, but the company is as well with earnings set to grow at close to double digits for at least the next decade.
