Powerboat sales rose 18% in September, marking the third consecutive month of double-digit gains. This is great news for the boating industry and boating stocks. On the back of these tailwinds, it's time to dig a little deeper and see what the investment landscape looks like.
More than just a boat manufacturer
Brunswick (NYSE:BC) has operations in marine engines, boating, fitness equipment, bowling and billiards. Its brands include Mercury, Bayliner, Boston Whaler, Sea Ray, Life Fitness and Brunswick. Brunswick was founded in 1845 and has been traded on the New York Stock Exchange for more than 85 years.
In the second quarter, revenues increased 4%. Revenue growth was led by outboard marine products, marine parts and accessories, fitness equipment and U.S. retail bowling. Revenue declines were seen in fiberglass sterndrive/inboard boats and in bowling products. Gross margin increased by 60 basis points, while earnings per share increased by 18% to $1.23.
In the next quarter, Brunswick will be increasing its capital spending by $25 million versus the prior year to $61 million. This will include $20 million to expand Mercury's manufacturing capacity in Wisconsin. The company is also investing in R&D for Mercury with a new 17,000 square foot facility that will house two new 18,000 gallon testing tanks for Mercury products.
Brunswick is also transitioning its pontoon manufacturing to a new facility in Indiana that is twice the size of the old one. This new facility is expected to be up and running in August. In terms of bowling, the company is opening two new locations to test its new retail bowling concept in Atlanta. Lastly, Life Fitness has a new cloud-based website and app that users can connect to while using Life Fitness machines.
In looking at its shares, Brunswick trades at a forward P/E of 16. Its enterprise value/EBITDA is 10. The company has $472 million in debt, but that is offset by $330 million in cash. The company pays a very small dividend of $0.05 per share. The company has done a great job paying down debt. In addition, the dividend payout ratio is only 8%. I see it increasing its payout ratio in the near future. Brunswick will also likely look at divesting some of its brands just like it did with the recent sale of its Hatteras and CABO brands.
The ultimate boat dealer
Marinemax (NYSE:HZO) sells new and used recreational boats. It is the world's largest boat dealer with 54 locations. Its top sellers include boats from manufacturers Sea Ray, Azimut, Boston Whaler, Bayliner, Hatteras, Meridian and Nautique.
In the third quarter, revenues grew 16% to $175.8 million, which compares to last year's sales of $151.3 million in the third quarter. Net income came in at $0.56 per share compared to $0.20 per share last year. Same-store sales increased 16%. This increase comes after an impressive 12% increase in same-store sales in the second quarter.
Going forward, Marinemax will benefit from the increase in boat sales. In terms of margins, new boat sales have the lowest margins for the company. It sees higher margins in the ancilliary businesses of finance, insurance, parts, service and storage. As more customers came to Marinemax for their purchases, those same customers will go back to Marinemax for the additional services.
Another driver of growth for Marinemax will be in its New York and New Jersey markets. That area is still dealing with the aftermath of Hurricane Sandy. Consumers are focused on repairing their homes and not on purchasing their next boat. According to CEO Bruce McGill on the company's earnings call:
Based upon feedback from our customers, we believe there will be significant pent up demand in the state of New Jersey starting in 2014.
In looking at its shares, Marinemax trades at forward P/E of 29 and has a PEG ratio of 1.46. Book value per share is $9.21.
The store for your boating supplies and accessories
West Marine (NASDAQ: WMAR) is the largest specialty retailer of boating supplies and accessories. The company has 294 company-operated stores in 38 states, Puerto Rico, and Canada, and five franchised stores in Turkey.
In the second quarter, revenues decreased 2.8% compared to last year. Comparable store sales decreased by 2.7%. Net income came in at $0.91 per share compared to $0.95 per share last year. Among the bright spots were a 12% increase in e-commerce sales and a 4.3% increase in merchandise sales. While customers were buying boats at Marinemax from Brunswick, the adverse weather kept their boats on dry dock, so they didn't need boating supplies from West Marine.
Even though West Marine posted a weak first half, there are items going forward that I like. The company remains debt-free and increased its cash position by $8.7 million to $45.8 million. The company decreased its inventories by 2.3%. West Marine is also opening two new flagship stores in the boating communities of Newport Beach, California and Virginia Beach, Virginia. West Marine also just opened a new flagship store in Portland, Oregon. In the first weekend alone, sales were triple that of last year's same weekend.
In looking at its shares, West Marine trades with a forward P/E of 16. It actually trades just slightly above its book value per share of $12.21. Its enterprise value/EBITDA is only 7.
I think the overall industry tailwinds are enough to keep these boating stocks afloat. Each company has strong market share in its respective category and these companies are the go-to destinations for boating enthusiasts. Of the three, I like West Marine for its low enterprise value/EBITDA and because the shares trade near book value.