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Marine Products Corporation (MPX, Financial), an Atlanta-based recreational boat maker, popped up on my screen for companies with strong profitability metrics and high returns on invested capital that trade at cheap price-earnings ratios.

The company’s market capitalization of $299.93 million is higher than its enterprise value of $278.36 million, meaning it has net cash and no debt. Marine Products also has a very high financial strength rating of 10 out of 10, high profitability and good growth. Based on its price chart, it appears the stock has benefited from Covid-19, although it is now suffering from the post-pandemic meltdown and the current bear market.

Marine Products designs, manufactures and distributes fiberglass boats under the Chaparral and Robalo brands, including propulsion boats, outboard boats and sport fishing boats. Split from RPC Inc. (RPC) in August 2000, the company sells its products through a network of 206 national authorized resellers and 92 independent international resellers.

finance

Marine Products’ second quarter 2022 results, which were announced in July, show strong performance, demand and backlog. The volume of units sold increased by 15% compared to the previous year. The company operated throughout the three-month period, unlike the second quarter of 2021, when its manufacturing plant was briefly closed due to raw material shortages.

Some of its supply chain issues have recently improved, but its production and timing of boat shipments continue to be affected by sporadic and unpredictable shortages of critical components. The company’s average selling prices rose 22% due to price increases implemented to cover higher material and component costs, as well as the model lineup migrating to larger boats in response to changing demand.

The actual order backlog as well as dealer order indications remain at historic highs, even though dealer inventories remain extremely low. Updated market share statistics for the 12 months ended March 31 indicate that the combination of Robalo and Chaparral outboard motors in the 18-36 foot category had a market share of 6.1%. The Robalo brand had the third highest market share in this category. Similarly, Chaparral held a 19.7% market share in the 21-34 foot sterndrive category, which was the second highest in this category.

Despite the very good results, the forward-looking market seems to be predicting a recession. This had an impact on the share price.

Since pleasure boats are a discretionary purchase, it is logical to assume that with higher interest rates and reduced economic activity, sales could decline. However, there are reasons to believe that the market may have overreacted. As such, now might be a good time to keep an eye on the stock as we head into the downturn. As investors favor defensive stocks during an economic downturn, they should also look to cyclical stocks. Downturns eventually reverse course, so investors should be prepared with a list of great cyclical names to carry on when the economy begins to recover.

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Over the past 10 years (between 2011 and 2021), revenue per share has increased by 11.94% and earnings per share have increased at a compound annual growth rate of 16.79%. The company has a strong balance sheet and an excellent track record of profitability. In fact, going back more than 20 years, Marine Products has only been loss-making once (in 2010). The stock is currently rated for a recession. The dividend is excellent at 5.48% with a payout ratio of 0.51.

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Conclusion

Several factors influence sales trends in the recreational boating industry, including general economic growth, consumer confidence, household incomes, availability and cost of financing, weather conditions, fuel prices, tax laws, demographics and consumer free time. Consumer demand began to increase significantly during the second quarter of 2020 as the Covid-19 pandemic encouraged US consumers to seek out safe outdoor activities involving a limited number of people. In addition, the value of residential and vacation properties in coastal and recreational areas also has an impact on sales.

The company operates in the outdoor recreational products industry and competes not only with other boat manufacturers, but also with other outdoor equipment such as motorcycles, ATVs and motor homes. As the chart below illustrates, Marine Products compares well to its broad competition.

Swap Symbol Company Current price Market capitalization ($M) Enterprise value ($M) Revenue ($M) Operating cash flow Free movement of capital P/E ratio PB report PS report Price/operating cash flow ratio Price/free cash flow ratio EV to EBITDA price-book-tangible
NYSE (MPX, Financial) Marine products company. 8.77 298 274 325 11.51 10.01 9.16 2.76 0.90 25.39 29.13 6.41 2.87
SIN (MCFT, Financial) MasterCraft Boat Holdings Inc. 19.84 360 379 708 73.31 57.49 6.37 2.51 0.51 4.97 6.33 4.19 4.61
SIN (A NEW, Financial) OneWater Marine Inc. 30.13 427 1007 1628 68.35 54.61 3.29 1.17 0.25 6.43 8.17 4.62 -1.91
NYSE (IIP, Financial) Polaris Inc. 97.10 5789 7591 8150 41.10 -267.50 22.60 5.38 0.73 149.77 0.00 9.47 37.78
NYSE (PORK, Financial) Harley-Davidson Inc. 35.18 5141 10808 5346 575.59 437.96 8.58 2.06 1.00 9.38 12.31 11.19 2.11
NYSE (BC, Financial) Brunswick Corp. 67.36 5019 7037 6390 379.50 26.20 8.47 2.50 0.82 1:65 p.m. 181.42 6.74
TSX (TSX: DOO, Financial) BRP Inc. 85.84 4929 6684 5960 442.10 -243.30 10.18 1073.00 0.86 15.93 0.00 6.96 -13.29
NYSE (THO, Financial) Thor Industries Inc. 74.27 3987 5345 16313 990.25 747.90 3.60 1.10 0.25 4.13 5.45 2.96 5.94
NYSE (LCII, Financial) LCI Industries Inc. 97.76 2486 3710 5559 212.54 85.17 5.02 1.79 0.45 11:70 am 29.13 4.61 7.61
NYSE (WGO, Financial) Winnebago Industries Inc. 55.15 1748 2086 4815 334.57 250.05 4.75 1.39 0.38 5.51 7.33 3.45 5.79

The company is playing on the growing income gap. Recreational boats like those made by Marine Products are typically purchased by the top 20% and highest earners. This group, largely made up of business owners and professionals, is only slightly affected by a recession given their wealth. Growth in the top income quintile has been good for the recreational boating sector.

Mr. Market sold the stock at a level as if we were already in a deep recession. Given that we are still at full employment, there is a good chance that the recession will not be as severe as Mr. Market anticipates and that the company will rebound quickly.

In addition, Marine Products has an impeccable balance sheet, which gives it great operational flexibility. While sales will likely decline from this year’s peak, there is enough evidence that the pandemic has pushed many more people into a recreational lifestyle that will endure and grow for years to come. Meanwhile, the company’s 5.5% dividend should satisfy investors.

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