MarineMax sets sail

Want to sail the seven seas in luxury?

MarineMax (HZO) can make that happen.

But for those of us still trying to generate that kind of wealth, investing in their shares might be an option.

This tiny $2 billion dollar company popped up in our proprietary data…

Because 13 financial pros searched for it.

Yes, you heard me right, 13.

That sounds pitiful until you realize no one EVER searches for this stock.

As we dug into the details of the company, we discovered an incredible value play that might get you one step closer to your dream boat.

Anyone heard of MarineMax?

Based out of Clearwater, Florida, MarineMax serves the niche growing market of yacht and recreational boats.

Anyone want to go halfsies on this $10 mill dream cruise?

In 2019, the global recreational boating market came in at $29 billion. 

From 2020-2027, it’s expected to grow at 5.1% annually to $35.4 billion.

Owning a boat isn’t cheap.

The upfront costs are prohibitive. Then, you’re stuck with storage and maintenance costs.

And if you buy fuel, that can get pretty expensive as well.

Expanding margins with high growth

What’s most impressive about MarineMax are their financials.

Over a 10-year period, the company quintupled revenue while expanding both gross and operating margin.

Their 5-Year average growth rate comes in around 15% annually for revenues, 30% for operating margins, and around 10% for earnings.

Profitability wise, the company boasts a current return on assets of 17.46% while typically averaging around 5%.

Return on equity comes in at 29.61% compared to an average around 10%-15%.

Return on investment comes in at 22.35% compared to an average of around 5%-7%.

Put quite simply, this company is a beast in terms of consistent shareholder performance.

Despite all this, shares traded between $15-$25 from 2014-2019.

Right now, the stock trades at 7.6 times this year’s and next year’s earnings.

So why is it so cheap?

There are usually two reasons a company is perpetually undervalued (AKA a value trap).

First, is a lack of growth. MarineMax doesn’t seem to suffer there.

Second, cash flow.

And that’s where they’ve struggled some.

From 2012-2017, MarineMax couldn’t generate much more than $10 million in cash from operations. 

In 2018, they jumped hard to $70.4 million. 

2019 was a decline of $12.4 million.

It was only in 2020 that it generated serious cash of $304.7 million.

The reason is simple – inventories.

Like Zillow (Z) now, MarineMax buys and sells boats.

That can be a boon or disaster depending on how it plays out.

Take a look below.

Trying to do a discounted cash flow analysis is tough because cash flow isn’t consistent.

If we used the most recent free cash flow from 2020 of $145 million, a quick calculation would yield a WACC of ~10.1%.

Using our same 10-year model with the industry 5.4% growth rate, we get a stock fair value of $101.30, nearly double the current price.

The problem with that assumption centers around the $145 million free cash flow.

As you can see below, it’s incredibly volatile for HZO.

To give you a sense of how things change based on that starting point, using the same model with $90 million as the FCF starting point, your share fair value drops to $62.88.

Technically speaking

From a technical standpoint the stock is on sound footing.

Looking at the weekly chart, we can see a key support level for shares around $45.50.

As long as shares remain above that price, they’re in a bullish position.

Given how little the stock is covered, it will take earnings catalysts to push shares over their highs above $70.

Our hot take

This stock is the very definition of a value trap…sort of.

For years it looked good on paper but cash flows were anemic.

Now, the question is whether they can keep that going.

Watch to see if the company can do better around cost and especially inventory controls.

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