Polaris Industries' (NYSE:PII) deep dive into the boating industry hit rough seas very quickly following the onset of the COVID-19 pandemic. The powersports vehicle manufacturer announced it was all but shutting down the fishing boat business it bought just over a year ago. Instead it will focus on the pontoon boat business it acquired from Boat Holdings in 2018.
While that might suggest Polaris might have jumped in too deep and too fast, a recent analyst note suggests there might be hope yet for the boating segment.
Riding the wave higher
Riley FBR analyst Eric Wold upgraded his outlook for small boat builder MasterCraft (NASDAQ:MCFT), boosting his target price for the stock from $10 to $16 per share, a 60% increase. One of Wold's arguments was that changes in consumer behavior due to the pandemic might actually become a growth driver for the business.
When Polaris Industries announced it was closing down its Syracuse, Ind. production facility, which made boats under the Striper, Rinker, and Larson FX brands, segment president Bob Mack said, "[C]onsidering market dynamics and the continued uncertainty around the sustained impact of the COVID-19 pandemic, we have decided not to move forward with investing the necessary resources to maintain and grow" the brands.
Yet the analyst research note about MasterCraft suggests that Polaris might have been hasty in its decision, even though there is still hope for Polaris' remaining pontoon and deck boat business. Wold said that demand for boats was actually growing week over week heading into the Memorial Day weekend.
Charting a course for growth
Although intuitively purchases for big, expensive consumer discretionary products like boats (and motorcycles, snowmobiles, and ATVs, too) should take a hit from the COVID-19 pandemic, the analyst believes boats are benefiting because people are staying closer to home this year.
With stay-at-home orders still in effect, even if they're winding down in many areas, the concept of a staycation is taking hold. AAA suspended its Memorial Day weekend travel forecast for the first time in 20 years due to the pandemic, and many areas saw far weaker traffic than is typical for the holiday weekend. That could help lift boat sales.
MarketWatch says Wold told investors in a note he expects MasterCraft "to benefit from improving demand for boating by families choosing to stay closer to home -- which could have a greater-than-average positive benefit for both ski wake models, but also pontoons (which [MasterCraft] plays in through the Crest Marine acquisition)."
A rising tide could lift all boats
There are a lot of players who can find a ray of hope in this view. Malibu Boats (NASDAQ:MBUU), for example, is a big player in watersports towboats, with almost every stern drive company and five of the top six inboard boat makers licensing Malibu's wakesurfing patents.
Polaris, though, is also poised to gain because pontoon boats and deck boats have been one of the fastest-growing segments of the market due to their versatility. They can be used for fishing, pleasure sailing, and parties, which was part of the original lure of the acquisition for Polaris.
Analysts still expect pontoon boats to experience exponential growth over the next few years. While Wall Street is particularly adept at simply drawing steeply inclined lines well into the future in their forecasts, there is some sense to the suggestion that even in the immediate future, boating can benefit.
Despite Polaris thinking the immediate future of boating looked grim after segment sales declined 16% in the most recent quarter, with gross profits down 18% from last year, analysts seem to believe otherwise.
I'm skeptical that people not traveling can so easily translate into them buying boats instead, as consumer personal finances have been rocked. Yet it might also just might mean they merely hit the pause button on their plans, and Polaris will resume sailing on some calmer seas sooner rather than later.