On April 2022 I wrote an article about OneWater Marine (ONEW) where I detailed why I do like this company so much and the beauty of its strategy (link here). At that time the company was trading at ~$31, it went to $43 in August 2022 and now has come back to $31 again.
This situation, together with the presentation of the FY2022 results, has made think about reviewing this company. My investment approach could be described as “buy & hold, but constantly revisiting”. I do tend to keep my positions as long as possible and to analyze companies always with a long-term view, but I also think that it is important to constantly incorporate new information to each thesis in order to act swiftly in case of any change. Stock price deterioration should never be, by itself, a reason to close a position, but it may be a trigger to review your analysis and check if something is happening and if your initial conclusions remain valid.
FY2022 Results
I have to admit that I was a little bit worried before this earnings season. I don’t really mind what happens to a company quarter by quarter. It’s rather strange just one quarter to change a long-term thesis enough to make me sell a position. In the case of ONEW, the company has been steadily executing its strategy with discipline and success, so I was not expecting something really extraordinary that could break my long-term opinion. However, my concern was more related with the boating industry as a whole and the comments that ONEW (and its peers) could provide in that sense. Being said that, let’s start with some highlights about ONEW’s results (I will keep industry comments for the next paragraph).
In general terms, for me ONEW’s results have been rather encouraging and specifically the guidance (all comments refer to FY results):
Revenue increased 42% in 2022, but more importantly ONEW recorded +12% same-store sales, “marking (their) fifth consecutive year of double-digit same-store sales growth”:
That could be rather expected taking into account the increase in ASPs, but it seems the company has also been able to increase its units sold.
Diversification is on track and ONEW has “significantly expanded (their) parts and service business with the additions of T-H Marine, Ocean Bio-Chem, YakGear and JIF Marine”:
Currently non-boat sales represent ~18% of its total sales (and this percentage could be even higher should we take into account that companies like Ocean Bio-Chem have only provided half-year results), a relevant increase form ~11% at the end of 2021. These high-margin less-discretionary businesses are expected to help mitigate any potential softening on boats demand.
Demand seems to remain strong, though with some signs of normalization.
ONEW comment that they see “continued demand for boats in all categories, but the 40-foot-plus range remains especially strong”. However, they also mention that they “expect a robust demand environment to moderate to more traditional seasonal cycles” in 2023. This is rather in line with the comments provided by many other companies in the sector (see next paragraph).
Margins have expanded on a YoY basis, though with some softening in the last quarters:
ONEW considers that new boat margins might have peaked for smaller boats, but still expects holding good margins in +30-foot boats. Those strong margins on boat sales together with the increasing importance of higher-margin non-boat-sales businesses are expected to keep ONEW with double-digit EBITDA margins in the future.
Supply chain issues remain challenging, but the situation started to ease in the last quarter.
In close relation with the previous point, inventory levels are recovering but are still well below 2019 levels in weeks-on-hand: the situation for smaller boats is normalizing but larger boats’ restocking is expected to continue into 2024.
The leverage ratio has increased to 1.6x due mainly to the acquisitions carried out during the year and it is now well above 2021 levels (0.3x):
However it is still in line with ONEW’s target ratio of 1.5x.
With regard to M&A activity, the company mentions that they will remain opportunistic but that they will probably slow down a little bit taking into account the macroeconomic situation.
The impact arising from Hurricane Ian has been rather limited ($25m in lost sales and $2m in P&L) and ONEW considers that this event could provide some positive impact in the future in terms of pent-up demand and boat replacements.
Guidance for 2023 is rather encouraging, with same-store sales in the range of low-to-mid single digits and EBITDA and diluted EPS slightly above 2022 levels (EPS would be slightly lower in adjusted terms). This is rather impressive taking into account that 2023 is expected to be a normalization year.
Industry Overview
Once commented ONEW’s results, I would like also to share some comments gathered from many of its peers and from other industry sources in order have a much broader view. Here you have a short summary of the main issues underlined:
Demand
As it is the case with ONEW, most industry players comment that retail demand continues to be strong, although they are starting to observe some return to more normalized levels and seasonality. They expect this tendency to continue in 2023 but at the same time they highlight some positive points that could help to offset this normalization process or at least to avoid a hard landing:
Demand for premium products and larger boats continues to be robust. Data show the industry retail trends have softened more in value segments, but even in this category there are executives that assure that it is behaving better than in 2021.
Boat buyers (especially the premium ones) are better positioned to withstand a recession than in previous crises thanks to much better economic conditions (e.g. low unemployment rates, higher saving rates or strong equity-home values).
Fiberglass boats and pontoons remain strong (vs aluminum fishing which is probably the slowest part of the market right now).
There is a broad acknowledgement that consumer sentiment is rapidly deteriorating but until now they think that is not having a real impact in terms of buying actions.
Supply chain issues
In few words, “supply chain pressures persisting across the broader marine industry” . The problems have not abated and shortages persist, and indeed they report that there are some areas that have even worsened.
Though companies like MarineMax (HZO) comment that the situation is “gradually improving”, there are still many delayed components that avoid manufacturers to maximize their production and dealerships to receive normalized levels of product.
Inventory levels and re-stocking
Inventory levels are still an issue. Most of the companies reports re-stocking problems and stock levels well below 2019. Brunswick (BC) and HZO for instance report being 40% and 64% lower than in 2019, respectively.
Some companies point at the possibility of reaching normalized levels of some models and categories by the second half of 2023, but most think that this understock situation will persist until at least 2024, specifically in the case of premium and larger products which are still very much in short supply.
Being an issue for many players in the industry, the positive side is that this situation leaves boating companies in a healthier position compared with previous downturns. During the GFC crisis one of the main issues for the boating industry was inventory levels and the necessity of carrying out a sizable reduction of them (with the correlative impact on margins and profitability).
In terms of inventory, it is also important to highlight a risk that is also mentioned by some players, which is the possibility of a flood of used inventory coming from first-time boat buyers. Although it has come back to normal levels in 2022, during 2020 and 2021 the percentage of the total new boats purchased corresponding to first-time buyers skyrocketed. Historically around 40% of these first-time buyers leave the industry in the first 5 years and this could create a relevant increase of used inventory.
Promotional activity & price realization
During the last years supply-demand imbalances and inflationary dynamics have allowed industry players to take advantage of a huge price realization and “virtually no promotional activity”: “they've been in a very unique heady environment of capturing MSRP or close to MSRP on boats for a two-year period, a 24-month period”. The feeling right now is that this promotional activity is gradually coming back, hand in hand with some normalization of inventory levels and the increasing competition for customers’ attention.
However there are still a lot of forces that invite to think that this return to a more normalized promotional environment migth be rather gradual and in any case “very selective or within certain segments or models” and right now it seems to not affect “the upper end more premium stuff”.
Hurricane Ian impact
In general terms, most companies report little impact coming from Hurricane Ian, with most of manufacturing facilities and dealerships resuming its operations shortly after this unfortunate event. Besides many mention that in the medium term, after insurance settlements take place, there could be some sort of positive effect as a result of replacements and delayed sales coming in.
Additional Comments & Final Decision
As mentioned at the beginning of this article, I was a little bit worried before this earnings season about what could be communicated by the different players in the industry. In the case of ONEW (and also some other peers) the results have been pretty satisfactory and I think the guidance for 2023 could be considered as rather encouraging. On the positive side, the demand seems to remain strong and specifically for premium categories (which is the main ONEW market), there are no inventory pileups (probably the opposite) and high prices are still rather resilient.
However, at the same time I have the feeling that there are some dark clouds in the horizon that are difficult to obviate. I think it is just a matter of time for the deterioration of the consumer confidence to turn into fewer or delayed buying decisions. Besides, the FED have made rather clear that it will not stop until inflation is well under control and this could mean that many of the factors supporting buying activity could reverse (i.e. interest rates could keep climbing, wealth effects deteriorate and unemployment rates rapidly increase). Finally, in case of entering into a recessionary period, though I have the feeling that the industry is better prepared than in previous crisis, we cannot omit that this is an industry highly sensitive to the economic situation and completely discretionary.
In addition, most of the insights included on the previous paragraphs come from the analysis of ONEW and its peers’ earnings releases and calls. The other sources of information that I could access provide a less-optimistic picture. In summary, they show a situation where prices have reached excessive levels; where customers are starting to delay their buying decisions, influenced by a mix of worrisome economic predictions and the possibility of getting better prices in the future; and where demand is rapidly deteriorating.
All in all, the situation is currently rather dynamic and it is difficult to have a clear picture about how will evolve in the short-to-medium term. After two really extraordinary years (2020 and 2021) and the current one that is being also rather successful for the boating industry, the feeling is that demand should return to more normalized levels. Should we add the possibility of a recession, the level of uncertainty increases appreciably. I don’t think customer situation and excesses could be compared with the GFC, but it is important to recall that the impact for the boating industry in that period was huge and the recovery rather low.
After taking into account all these insights, my feelings stay rather mixed and I have made the decision of trimming my position. ONEW represented a relevant part of my portfolio and I was not comfortable with this situation. I still believe that ONEW is a really good company and will probably keep thriving in the future (this is the reason to not completely close the position), and it is currently trading at 3x EV/2023E EBITDA and probably many of these concerns are already priced in. Besides I don’t really like the felling that perhaps I’m making this decision more influenced by macroeconomic factors (actually nothing has really changed in the thesis). However I think that it is important to distinguish between general macroeconomic factors and macroeconomic aspects that specifically can affect the industry where the invested company is. I would never make an investment decision based only on one specific interest rate hike or GDP publication, but in the case of cyclical companies I think it is rather important to incorporate in the analysis where we are in the cycle, how the economy could evolve and how the company is exposed to this evolution.
Besides, it also relevant to highlight that investing is a relative game. I mean that in order to decide which positions to invest in (and the specific weight of each position) of course one needs firstly to make the decision based on each company itself. However, once we have made the decision that a specific company is investable, the second task is to compare with other alternatives. There are situations where you can find good investment opportunities but, comparing with your current positions, you can consider that these new opportunities don’t deserve to displace the existing ones. However there are other situations where these new companies are better than the ones that are already in the portfolio and this makes you rebalance your positions or weights. The latter has been for me a relevant factor in this case: I still like ONEW, but I am finding other companies that nowadays provide better risk/reward opportunities.
Finally, I would like to highlight that of course this is not at all an investment advice and everyone should make their own analysis, but I wanted to share my “revisiting” thoughts on the company. After that, the floor is yours. What do you think about the current situation of the boating industry and specifically about ONEW?
Interesting article! I still believe the risks are mitigated by the current low valuation... Would you mind sharing which companies are you buying instead?