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Why Malibu Boats Inc. Is a Cut Above Other Boat Builders

By Mark Lin – Mar 19, 2014 at 1:00PM

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Notwithstanding the capital intensity and economically sensitive nature of the boat building industry, Malibu Boats remains a good investment candidate.

Source: Malibu Boats

The National Marine Manufacturers Association values the U.S. market for powerboats at $4 billion, and recent trends point to strong growth prospects. While new powerboats accounted for 25% of powerboats sold prior to the global financial crisis, they only accounted for one in six powerboat sales in 2012. In addition, the high average age of powerboats now (20 years) relative to historical levels (15 years in 1997) suggests that pent-up demand from consumers will drive an increase in the number of new boat sales. Listed in January this year, Malibu Boats (MBUU -3.54%), a leading manufacturer of performance sport boats, is better positioned than its peers, Marine Products (MPX -3.63%) and Brunswick (BC -5.36%), to benefit from the positive industry outlook.

Gaining market share
As mentioned above, the outlook for the powerboat industry is promising. However, the potential growth is unlikely to be equally shared among all powerboat categories, with performance sport boats being the key beneficiary. For the first nine months of 2013, new unit sales of performance sport boats in the U.S. grew by 11%, compared with a 2% growth rate for other powerboats during the same period. Based on statistics from The National Marine Manufacturers Association and Malibu Boats' internal estimates, performance sport boats have gained about 10% market share at the expense of their sterndrive counterparts since 2001.

The numbers above should worry sterndrive boat manufacturers Brunswick and Marine Products. Marine Products' Chaparral brand was the top-ranked manufacturer in 2013 in the 18- to 35-foot sterndrive category with respect to retail sales; while Brunswick's Sea Ray and Bayliner brands were ranked second and fifth, respectively, on the top-10 list.

Although Chaparral's market share increased from 11.7% in 2012 to 13.9% in 2013, there was no escaping the fact that industrywide sterndrive sales declined and Marine Boats' revenues from sterndrive boats fell by 3.5% in 2013. While Marine Boats' market share gains validate its success in expanding into cheaper, entry level boats in the 18- to 20-foot category, performance sport boats have gained great success with its appeal to a wider audience interested in wake surfing and other water sport activities.

Malibu Boats is the outright market leader in performance sport boats and has seen its market share in the category increase from 23.9% to 32.9% over the past five years. Even more noteworthy is the fact that almost all of its major competitors lost market share during the period, suggesting that Malibu Boats hasn't just ridden along on industry growth but has gained a real edge over competition.

For example, MasterCraft, the market leader in in 2008 with a 23.8% market share at that time, now only accounts for about 19.7% of all performance sport boat sales. With current performance sport boat sales still at about half the volume as it was between 2001 and 2007, Malibu Boats is well-positioned to benefit from further growth in the category.

Business strategies to fight the economics of a difficult industry
Notwithstanding the positive outlook for the boating industry in the near term, boat building has historically been a tough business because of the industry's cyclicality and asset intensity. Despite this, Malibu Boats achieved higher margins than its peers with a combination of pricing power through product innovation and cost efficiency via vertical integration. Malibu Boats boasts margins superior to those of its peers. For the trailing 12 months, it delivered EBITDA margins of 19.4%, compared with margins of 10.6% and 5.3% for Brunswick and Marine Products, respectively.

Source: Malibu Boats

Malibu Boats has always been committed to product innovation; one example is its release of its patented Surf Gate technology in 2012. With its proprietary water diversion technology, Surf Gate can change the surf wave from one side of the boat to the other, allowing wakesurfers the flexibility to surf on either side of the boat.

With respect to vertical integration, Malibu Boats is the only performance sport boat company to manufacture towers in-house, following its acquisition of the assets of its supplier Titan Wake Accessories in 2009. This helps to reduce costs by minimizing rework through increased collaboration between the engineering and manufacturing teams.

While Malibu Boats has increased its odds of thriving in a tough industry through product innovation and vertical integration, Brunswick has chosen to diversify outside of the boat building industry. Revenues from recreational products such as fitness equipment, bowling products, and billiards currently account for a quarter of Brunswick's revenues. In particular, fitness equipment has been a bright spot for Brunswick, with segment revenues growing by 9% in 2013. In contrast, its boating segment increased sales by only 3% over the same period. More importantly, Brunswick's customers in the fitness equipment segment tend to be less economically sensitive customers than buyers of powerboats.  

Foolish final thoughts
The near-term prospects for the powerboat industry are excellent, especially for the performance sport boat segment, where Malibu Boats is the clear market leader. Furthermore, Malibu Boats has a better ability to withstand any industry downturn by virtue of its pricing power and cost efficiency.

Mark Lin has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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