Thanks for the write-up. I have a question about your steady-state operating margins. Despite your inelastic demand argument, the assumption of 14% seems a bit too high. From my research on the industry, I see that during downturns margins significantly contract. The only remaining public comp with a date spanning back to 2002 e.g. before the first industry cycle peak this decade in 2006 is MPX. And if you look at their EBIT margin progression you will see that margins go to negative territory and stay at low single digits until the 2011-12 trough in the industry. The average margin for MPX was 9% from 2002-2009 and then again 9% from 2009 till now. I understand both MSFT and MBUU are better positioned but in my mind, they don't seem that far away. Again, I am no expert on the space just wondering what are your thoughts on this and how confident you feel about margin assumption.
Also, there are way too many brands in the space, and even though both MBUU and MCFT have significant shares, those brands do still compete between themselves and cannibalize the sales to some degree. Can we call that really a duopoly?
Sorry, busy few weeks getting started with a new job. Will try and get you a proper answer in the next few days. On the surface you make some good points. I think their margins can (and might) contract, but over the long term they will pick back up. I’m less worried because of the nature of how the business works; they don’t sell directly to buyers, they sell to retailers so they can be a bit more nimble in reacting to market dynamics (i.e. decreasing demand) should that come, but I will definitely take another look at the underlying assumption there.
To your point on the “duopoly”, my focus was more towards the market for ski and wake boats, which Malibu and Mastercraft dominate, as opposed to the total market, which includes the other sub-brands. I think those sub-brands are still good for the long term, but the core business and the real advantage is in the wake category, where Mastercraft has been (and I think will be) the leader for a long time, and a step ahead of the smaller players.
I appreciate the thoughtful comment, and if anything changes I will try and get an update out if I can find the time. Interested to see where margins and demand go in this environment.
I like the writeup and the outlook, although I am concerned on the customer spending. Given the current state of the company, would you agree that a potential investment in MCFT is a bet the customer spending will stay as is in the mid-term?
While personally I'm quite convinced this will be the case (especially given MCFT's market positioning) I'm rather sitting out on cyclical opportunities like these. Would love to hear your thoughts on this as I might be not educated enough on the industry and/or how it differs from others.
In my opinion, I think they will be fine in the mid-term. The reason I think that is because of who Mastercraft’s customers are (wealthier people and families). Even in the event of a recession, a large share of the company’s customers will still have significant disposable income, and I can tell you first hand that around where I’m from, there is serious loyalty to wake/ski boat brands. Like I said, it requires more research, but on that front I think they’ll be alright.
Thanks for the write-up. I have a question about your steady-state operating margins. Despite your inelastic demand argument, the assumption of 14% seems a bit too high. From my research on the industry, I see that during downturns margins significantly contract. The only remaining public comp with a date spanning back to 2002 e.g. before the first industry cycle peak this decade in 2006 is MPX. And if you look at their EBIT margin progression you will see that margins go to negative territory and stay at low single digits until the 2011-12 trough in the industry. The average margin for MPX was 9% from 2002-2009 and then again 9% from 2009 till now. I understand both MSFT and MBUU are better positioned but in my mind, they don't seem that far away. Again, I am no expert on the space just wondering what are your thoughts on this and how confident you feel about margin assumption.
Also, there are way too many brands in the space, and even though both MBUU and MCFT have significant shares, those brands do still compete between themselves and cannibalize the sales to some degree. Can we call that really a duopoly?
Sorry, busy few weeks getting started with a new job. Will try and get you a proper answer in the next few days. On the surface you make some good points. I think their margins can (and might) contract, but over the long term they will pick back up. I’m less worried because of the nature of how the business works; they don’t sell directly to buyers, they sell to retailers so they can be a bit more nimble in reacting to market dynamics (i.e. decreasing demand) should that come, but I will definitely take another look at the underlying assumption there.
To your point on the “duopoly”, my focus was more towards the market for ski and wake boats, which Malibu and Mastercraft dominate, as opposed to the total market, which includes the other sub-brands. I think those sub-brands are still good for the long term, but the core business and the real advantage is in the wake category, where Mastercraft has been (and I think will be) the leader for a long time, and a step ahead of the smaller players.
I appreciate the thoughtful comment, and if anything changes I will try and get an update out if I can find the time. Interested to see where margins and demand go in this environment.
Thanks for another good read Benji!
I like the writeup and the outlook, although I am concerned on the customer spending. Given the current state of the company, would you agree that a potential investment in MCFT is a bet the customer spending will stay as is in the mid-term?
While personally I'm quite convinced this will be the case (especially given MCFT's market positioning) I'm rather sitting out on cyclical opportunities like these. Would love to hear your thoughts on this as I might be not educated enough on the industry and/or how it differs from others.
In my opinion, I think they will be fine in the mid-term. The reason I think that is because of who Mastercraft’s customers are (wealthier people and families). Even in the event of a recession, a large share of the company’s customers will still have significant disposable income, and I can tell you first hand that around where I’m from, there is serious loyalty to wake/ski boat brands. Like I said, it requires more research, but on that front I think they’ll be alright.