Recent results should have torpedoed the stock, but Marine Products
A little more than a month ago, this Motley Fool Hidden Gems pick reported fourth-quarter numbers that missed expectations not by a fathom, but by a league. Expected to report flat sales, the company instead announced a 7.5% decline. Expected to see profits slip 10%, the company reported a 20% drop.
Yet in the news' wake, Marine Products' stock declined just $0.06 in value -- less than 1%. And today it's moved higher still. So what gives?
As a shareholder in Marine Products, I had mixed feelings about what happened, or, rather, what didn't happen, back in July. On the one hand, I thought that expectations for the company had loaded so much ballast on the stock that even worse-than-expected news wasn't enough to tank it. On the other hand, I wanted to know whether investors' newfound optimism was, well, anchored in reality.
And so I began digging. Or perhaps wading. Bailing through buckets of earnings news, and conference calls discussing the same -- not just from Marine Products, but also from fellow boat maker Brunswick
Bigger is better
Twin boat makers Marine Products and Brunswick both reported declines in sales last quarter. For Marine Products, it was a 7.5% drop. Brunswick took a 2% hit to sales in its marine engine segment, and although boat sales rose 3%, that growth came entirely from acquisitions; organically, sales in the boat unit slipped 7%, in line with Marine Products' drop.
According to Marine Products' CEO Rick Hubbell, consumer demand for its boats began to slacken more than six months ago, in the fourth quarter of 2005. Hubbell noted that the slowdown has been most evident in smaller boats. To illustrate, he described how, in Q2 2006, unit sales declined 22%. He attributed the more muted 7.5% decline in "dollar sales" to the fact that the boats Marine Products did sell this quarter had a higher average selling price per boat. At last report, bigger and better-appointed boats were still selling "very well"; it's the "entry-level" boaters that are feeling the pinched wallets right now.
Brunswick wasn't as specific on what size boats were the slowest sellers, but one of its major retailers was. "The largest segment that seemed to have softened is boats below 23 feet," reports MarineMax. MarineMax also echoed Marine Products' observation that because bigger boats carry bigger price tags, the reduction in retail unit sales of smaller boats was having a more limited impact in depressing dollar sales.
Beware the shoals
So far, so good. "But what does the future hold?" you ask? Well, one analyst on Marine Products' conference call observed that "in prior [boat industry] cycles, first small boat demand starts to fall off and larger, more expensive boat demand stays pretty strong, but eventually ... the demand for larger, more expensive boats starts to wane as well." Marine Products' execs seemed to accept that description at face value. In contrast, MarineMax repudiated it, saying: "We don't really subscribe to the idea that the high-end seems to soften after the smaller boats. ... We think the high-end market is going to continue [to grow.]"
All engines back!
Perhaps MarineMax is right; if so, it may be able to ride out the current industry troubles by pushing the sale of high-end boats. The manufacturers themselves, however, won't be so lucky. Fewer boat sales means these firms won't be able to use their production facilities to full capacity, and that, in turn, will reduce (indeed, has already reduced) operational efficiency, putting pressure on margins.
Both Marine Products and Brunswick noted that their inventories were on the high side last quarter, as one would expect in a slow sales environment. And the two boat makers are taking nearly identical steps to deal with the problem -- offering incentives to spur reluctant buyers, and cutting production to give already-built boats time to flow through the product pipeline. The resulting loss in efficiencies of scale drove Brunswick's operating margins down 90 and 310 basis points in marine engines and boats, respectively. Marine Products' operating margin slid 330 basis points last quarter.
And things could get worse. According to MarineMax CFO Mike McLamb, the retailer is "forecasting to purchase less product in model year 2007 in terms of dollars than we did in model year 2006 ... our purchases are expected to be down in the high single digits as a percentage."
Calmer seas ahead?
But what if Karl Marx was wrong? What if history doesn't repeat itself? Marine Products was asked this question and suggested two possibilities for short-circuiting the present downward slide in the boat industry cycle. First, a "nice turn in the economy" might help entry-level buyers feel more confident in their finances, and more willing to pony up for a new boat. Failing that, "declining boat prices, declining insurance costs, and better consumer sentiment" would do the trick.
With the Fed only pausing its interest-rate hikes in response to evidence that the economy is slowing, however, the first option looks unlikely. The second option looks a little more likely. If consumers who postponed buying after last year's string of hurricanes -- while waiting to see whether this year's storm season will be as destructive as last year's -- decide to reopen their wallets (and if boat prices remain reasonable), then sales could strengthen. Then again, by raising prices last year and this to cover rising raw-material costs, Marine Products is working at cross purposes to its own hope for renewed buying activity.
If asked to bet on either of the above Goldilocks scenarios materializing, versus the likelihood that a historical cycle will, well, cycle through as it has in the past, my money's on History. And given that high-end boat sales still haven't slumped, History suggests that the boat makers haven't seen the worst of this cycle yet.
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