MasterCraft Boat Holdings stock still an attractive prospect (NASDAQ:MCFT)

Brian Koellish

Boating can be a fantastic way to spend your time if you like to relax and have the money to afford one. However, given the recent economic concerns, we have seen some pessimism set in around some of the companies in this space. A good example of this can be seen by looking at MasterCraft Boat Holdings (NASDAQ:NASDAQ: MCFT). This particular company operates as a manufacturer of recreational powerboats, with some costing as low as $30,000 and others exceeding $900,000. The company’s recent financial performance has been impressive and the company is undergoing an interesting change. Even though management expects lower profitability for the just-started fiscal year 2023, stocks are still trading at very cheap levels and warrant upside potential going forward. For this reason, I’ve decided to keep my “buy” rating on the company for the time being.

Cruising with MasterCraft Boat Holdings

In January of this year, I wrote an article that had a favorable opinion of MasterCraft Boat Holdings. In this article, I acknowledged that I was impressed by the historic growth of the company. The last few years have been pretty impressive and the company has finally gotten to the point where it can generate some good cash flow. I also said that some of the increase in revenue and profitability was likely temporary, but I always maintained that the stocks were cheap enough to warrant a “buy” rating, reflecting my belief that ‘they would likely outperform the broader market for the foreseeable future. So far, this call hasn’t gone exactly as I would have guessed. While the S&P 500 is down 6.9%, shares of MasterCraft Boat Holdings generated a loss of 13.1%.

Historical financial data

Author – SEC EDGAR Data

Based on this decline, you might initially think there are issues with the company. But that’s not exactly the case. To start, let’s discuss how the company ended its 2022 fiscal year. According to management, sales for the year were $707.9 million. This represents a considerable increase of 34.6% from the $525.8 million in revenue generated by the company in 2021. This increase came as the number of units sold by the company increased from 7,197 to 8,217. Another factor was the increase in the average selling price of a boat. This number has increased from $73,000 in 2021 to $86,000 in 2022. The average sale price of its key brand, MasterCraft, has increased over this period from $106,000 to $130,000.

With this increase in turnover, profitability followed. The company’s net income increased from $56.2 million in 2021 to $58.2 million in 2022. Although this increase is small, it should be noted that if we look at the adjusted net income, the table is much better, with the metric dropping from $62.8 million to $84.6 million. Operating cash flow increased from $68.5 million to $73.3 million. Meanwhile, the company’s EBITDA also increased from $92.8 million in 2021 to $121.1 million in 2022.

When it comes to fiscal year 2023, things are going to be a bit interesting. This is because this year will not be exactly comparable to what previous years have looked like. This is due to management’s decision to sell its NauticStar business to Iconic Marine Group on terms that were not disclosed to shareholders. Really, the only thing we know about this is that NauticStar has been a problem for the company for the past few years. While revenue in 2022 was $66.3 million, it generated an operating loss of $38.3 million for the year. This compares to the $2.7 million loss generated on $59.8 million in sales in 2021. Clearly, this should have a significant positive impact on the company’s bottom line. That said, we don’t see much evidence that this will come into play in the company’s 2023 fiscal year.

Trading multiples

Author – SEC EDGAR Data

I say this because, according to management, the company’s earnings are expected to weaken slightly in fiscal 2023. For example, the company’s EBITDA is expected to be between $105 and $115 million. If we apply the same year-over-year decrease, using median numbers, to the company’s operating cash flow, that metric should be around $66.6 million. At the same time, adjusted earnings per share are expected to be between $3.89 and $4.31, translating from the company’s current stock count into adjusted earnings of $76.4 million. if we were to value the company based on these numbers, the stock should be trading at a forward price multiple of earnings of 7.3. The price to operating cash flow multiple would be 5.8. And the EV/EBITDA multiple would only reach 3.7. This last multiple is a bit uncertain because we don’t know how much money the company generated from the sale. My calculation, due to timing, does not include net debt reduction.

As part of this analysis, I also decided to compare the company to five similar companies. On a price/earnings basis, these companies ranged from a low multiple of 4 to a high of 11. In this scenario, two of the five companies were cheaper than MasterCraft Boat Holdings, while a third tied with it. Using the price/operating cash flow approach, the range was between 4.1 and 30.3. In this scenario, two of the five companies were cheaper than our prospect. And when it comes to the EV to EBITDA approach, the range is between 2.2 and 7.6, with only one of the companies being the cheapest.

Company Prizes / Earnings Price / Operating Cash

EV / EBITDA

MasterCraft Boat Holdings 7.3 5.8 3.7
OneWater Marine (ONEW) 6.9 4.1 5.3
Marine Max (HZO) 4.0 4.6 2.2
Malibu Boats (MBUU) 7.3 7.0 4.9
Brunswick Corporation (BC) 9.3 15.2 7.0
Marine Products Corp. (MPX) 11.0 30.3 7.6

Carry

While I understand there is some pessimism about the short term future of the boating industry, I also think the share price of a company like MasterCraft Boat Holdings is incredibly down. It is true that the company seems to be approaching fair value compared to similar companies. But overall, it should offer good upsides if things go well and limited downsides if things go wrong. So while the past few months may have been painful for shareholders, I still think a “buy” rating on the company is appropriate at this time.

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