Description

Investment Thesis

MCBC Holdings, Inc. (MCFT) is a manufacturer of sport boats used for water skiing, wakeboarding, and wake surfing, as well as general recreation boating.  The Company sells its boats under the MasterCraft brand.  The stock should appreciate in price due to two main drivers.  First, the Company recently acquired NauticStar, a manufacturer of 18-28 foot bay boats, deck boats and offshore center console boats.  This sizeable acquisition will cause a significant increase in MCFT’s earnings power going forward.  Second, the Company is a beneficiary of the US Tax Cuts and Jobs Act (TCJA), the effects of which do not yet appear to be reflected in consensus estimates.

On 2/8/18 MCFT will report 2Q18 earnings.  With this report not only will the Company present the first full quarter of the pro forma entity’s financials but also management will likely update their 2018 EPS guidance from “up 25% over 2017” on a pre-TCJA basis (see 1Q18 earnings release).

Incorporating the effects of both the NauticStar acquisition and the TCJA as shown in the included model, I believe MCFT can generate ~$2.40 in 2019E EPS.  This is well above the current consensus estimate of $1.93.  MCFT’s closest comps are Marine Products Corp (MPX) and Malibu Boats, Inc. (MBUU).  Based on consensus estimates, MPX is trading at 21.5x 2018E EPS and 19.6x 2019E EPS and MBUU is trading at 16.4x 2018E EPS and 14.6x 2019E EPS.  Applying a 15.0x PE multiple on MCFT’s projected 2019E EPS of $2.40 yields a stock price of $36, ~50% upside from its current price of $24.

Company Description

Founded in 1968 MCFT is a manufacturer of sport boats used for water skiing, wakeboarding, and wake surfing, as well as general recreation boating.  The Company sells its boats under the MasterCraft brand.  The Company manufactures its boats at its headquarters near Knoxville, TN.  MCFT sells its boats through an extensive network of independent dealers in North America and internationally.  MCFT’s boats are the exclusive performance sport boats offered by the majority of its dealers.

Investment Merits

·         Leading Market Share Position in a Sizeable Market – During 2016 retail sales of new powerboats in the US totaled $8.3 billion, according to MCFT.  Over the last decade, MCFT has consistently held a leading market share position in the U.S. among manufacturers of premium performance sport boats based on unit volume.  According to Statistical Surveys, Inc. (“SSI”), MCFT’s U.S. market share in December of 2016 was 21.5%.  MCFT believes its sales have grown as dealers and customers continue to recognize the superior quality and performance of its recently released boats, and that the Company just starting to realize the market share benefits of the many recent new product offerings and product enhancement initiatives that its management team has implemented during the past several years.  For example, MCFT’s MasterCraft NXT line of entry-level boats further increases the Company’s market share as it represents its first offering in this market segment, which accounts for approximately one-third of the performance sport boat category.

·         Strong Growth Driven by Favorable Industry Trends - According to SSI, new unit sales of performance sport boats in the U.S. increased at a CAGR of 12.6% from 2013 to 2016 while new unit sales of all fiberglass power boats contracted at a CAGR of 5.5% in the U.S. over the same period.  MCFT believes the performance sport boat category has grown at a faster rate due to increased innovation in the features, designs, and layouts of performance sport boats.  These innovations have improved the performance, functionality, and versatility of these boats as compared with other recreational powerboats, particularly boats in the sterndrive category, which have not experienced the same degree of innovation.  In addition, MCFT believes it is well-positioned to benefit from several trends underway in its addressable market, including:

§  Performance sport boats are taking greater share of the overall fiberglass powerboat category;

§  Inventory of two-to five-year old pre-owned boats has become limited, driving consumers to purchase new boats;

§  Ease-of-use and performance innovations have accelerated product cycles driving consumer demand for new products; and

§ Higher consumer confidence influenced by improving macroeconomic conditions, including increased home values and greater workforce participation, has helped to drive increased consumer demand for powerboats.

·         Sales Levels Remain Well Below Historical Peak - While the performance sport boat category has grown in recent years, new unit sales remained significantly below historical peaks.  According to the National Marine Manufacturers Association, the 8,782 new performance sport boat units sold in 2016 were approximately 30% below the observed peak in 2006.

·         Low Capex Requirements – Capital expenditure requirements for MCFT are minimal.  MCFT’s capex was $3.5mm, $3.8mm and $4.1mm in 2015, 2016 and 2017 vs. EBITDA of $31.5mm, $41.2mm and $43.5mm in those same years, respectively.  Management is very disciplined with capital spending and has a self-proclaimed aversion to “bricks and mortar”, commented on in numerous earnings calls.

Acquisition of NauticStar

On October 2, 2017 the Company acquired NauticStar, a manufacturer of 18-28 foot bay boats, deck boats and offshore center console boats, for $79.8 million.  This is a sizeable acquisition for MCFT given its current market capitalization of ~$450 million.  Within MCFT’s 1Q18 (June FY end) earnings presentation (11/9/17) and the Company’s November Investor Presentation (11/13/17), both of which can be found on the Company’s website, MCFT management presents financial information for NauticStar as well as updates the Company’s guidance for 2018 to account for the acquisition.  Management expects NauticStar to provide $0.15-0.20/share of EPS accretion during the nine months post acquisition, as stated on their 1Q18 earnings call.  On 2/8/18 MCFT will report 2Q18 earnings, the first report by the Company which will show a full quarter of the pro forma entity’s financials.  NauticStar will be presented as a separate segment, providing investors with greater transparency.

The value-enhancing opportunity for MCFT from the acquisition of NauticStar is two-fold:

·         Higher Production to Satisfy Demand – NauticStar’s year-over-year unit growth is among the strongest in the 18- to 28-foot category and demand domestically currently exceeds supply.  MCFT intends to leverage their in-house operating strengths and manufacturing know-how to help NauticStar increase their production output to satisfy demand.  Specifically, in “Phase 1” MCFT management believes there is an opportunity to “break NauticStar’s production constraints” and increase NauticStar’s unit production volume by 15-20% without any additional capital investment.  Of note, management commented on the 1Q18 earnings call that by the end of 2018 “many of the things that we want to accomplish [with NauticStar] will have been done.”  Then, in “Phase 2” MCFT management believes there is an opportunity to expand NauticStar’s production by another 25-30% in unit volume above the initial 15-20% increase.  Management is unsure how much additional investment Phase 2 will require but will be striving to complete it with as little capex as possible.  All of these figures were noted by management during the 10/2/17 NauticStar acquisition call.  The greater production throughput will not only drive topline growth but should also be margin enhancing through operating leverage.

·         Expansion of Dealer Network - NauticStar currently sells its boats in the United States through an established network of 70 dealers.  According to MCFT management, NauticStar is primarily an Eastern US company, serving the geographic area between the Atlantic Ocean and the Mississippi River and from the Canadian border to the Gulf of Mexico.  MCFT intends to expand NauticStar’s dealer network (i) west of the Mississippi River and (ii) internationally – Canada, Europe and Australia.  Of note, MCFT does not intent to sell NauticStar products through its existing dealer network.

In addition, the acquisition of NauticStar provides MCFT with a presence in salt water fishing as well as outboard propulsion, two of the fastest-growing segments in the broader boating industry, according to management.

Financials

Catalyst

On 2/8/18 MCFT will report 2Q18 earnings.  With this report not only will the Company present the first full quarter of the pro forma entity’s financials but also management will likely update their 2018 EPS guidance from “up 25% over 2017” on a pre-TCJA basis.  This should serve as a positive catalyst for the stock.