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Boat sales show single-digit growth in July

Posted on August 21st, 2014
Written by Jack Atzinger


Last July, recreational boat sales roared off to double-digit gains as the industry recouped sales lost to a wet and chilly spring.

July sales this year lagged 2013’s blistering performance, but builders and dealers achieved moderate gains as the industry continued to recover from the effects of bitterly cold early spring weather that appeared to discourage buyers.

Sales in the main powerboat segments rose 3 percent, or 363 boats, to 12,450, and they climbed 8 percent industrywide, or 1,734 boats, to 23,402 in 31 early-reporting states that represent 68 percent of the U.S. market, Statistical Surveys reported today.

The results for the month mirror those for the year through July in those 31 states. Sales in the main segments are up 3.6 percent, or 3,206 boats, to 91,572, and they are 8.2 percent higher industrywide, or 11,276 boats, at 148,174.

A year earlier, sales in the main segments rose 18 percent and industrywide sales gained 12.9 percent. Ryan Kloppe, Statistical Surveys’ national marine sales manager, said July results this year suffered by comparison.

“Compared with a very good July last year, we still saw positive growth,” he said. “The categories in the main segments that have been growing are continuing to increase.”

Kloppe said he expects sales to continue to rise in August.

“I don’t think we’ll be seeing a lot of double-digit gains in the categories, but there should continue to be slow, moderate growth,” he said.

Sounding

Click to enlarge.

The industry’s main drivers since the recession — aluminum fishing boats and pontoons, and 11- to 40-foot fiberglass outboard boats — continued to advance in July. Sales of the fishing boats rose 3.7 percent, or 99 boats, to 2,772, sales of pontoons gained 5.3 percent, or 218 boats, to 4,330, and fiberglass outboard sales climbed 6.6 percent, or 233 boats, to 3,781.

The 14-to 30-foot sterndrive and inboard fiberglass category was the only high-volume group in the main segments that showed a sales decline in July. Sales fell by 198 boats, or 12.8 percent, to 1,352.

More boats were sold in seven of the top 10-selling states in July this year than in the same month last year. Kloppe said sales grew 35 percent in Tennessee, 28 percent in Florida and 25 percent in California.

Florida was the sales leader with 3,115, a gain of 682, Texas ranked second, with 3,072, a gain of 112, and Michigan was third with 2,223, an increase of 120.

Sales were lower in Minnesota (1,314, a drop of 246) and New York (1,297, a decline of 85), but higher in California (1,253, a gain of 253) and North Carolina (1,134, an increase of 176. Rounding out the top 10, sales were lower in South Carolina (967, down 90), but higher in Tennessee (820, up 205) and Ohio (808, up 27).

The Coast Guard was up to date in its reports of documented vessels, providing a complete picture of sales in the low-volume bigger-boat categories. Sales of 31- to 40-foot cruisers rose by 16, to 127, sales of 41- to 62-foot yachts fell by 11, to 61, and sales of 63- to 99-foot yachts rose by six, to 27.

Among smaller vessels, sales of personal watercraft climbed 15.4 percent, or 1,004 units, to 7,535, sales of jetboats rose by 21.5 percent, or 78, to 440, and ski-boat sales climbed by 54, or 7.6 percent, to 769.

Kloppe said the ski-boat segment has benefited as builders design and produce more multipurpose boats.

“They’re continuing to innovate their products to have fun on the water,” he said.

Sailboat sales fell by 18, or 6.7 percent, to 251.

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Afloat: Devoted Scott's a shining light

Afloat: Devoted Scott’s a shining light

By Emma Stevenson, Afloat

DEVOTED TO THE CAUSE: Scott Chudley

YOUNGSTER Scott Chudley has been demonstrating his dedication to sailing by giving up his spare time to volunteer at the Weymouth and Portland National Sailing Academy (WPNSA).

Chudley started sailing through the Sail for a Fiver scheme, sponsored at the time by the Chesil Trust, when he was only nine years old.

It was also at this age that he began to volunteer at the WPNSA in various roles along with his parents and older brother – he dedicated all his weekends and holidays in 2012.

He said: “This included many things such as being in charge of the tally board at large events to being on the ribs and the committee boats.”

Last summer he also had the opportunity to learn new skills and was the assistant race officer at a national Laser event, a role which he thoroughly enjoyed.

Always thinking of others, when the Bridport Lions Club awarded him £100 in recognition of his services, he gave half to Weymouth RNLI and used the rest to buy a new buoyancy aid.

More recently, Chudley was lucky enough to sail on the Challenger Yacht on a journey from from Portsmouth to Guer-nsey.

While aboard he achieved the Royal Yachting Association competent crew award and climbed 92 feet to the top of the mast twice, an experience which he says is his favourite.

He has also qualified as an assistant instructor for the Andrew Simpson Sailing Centre.

On that, he added: “Being part of the great legacy teaching young people how to sail is fantastic – it is what Andrew loved most.

“I was very lucky to have met Andrew and his fellow Olympic sailors and this year I have met his children and been on the water with them.

“I feel very privileged to have been given this amazing opportunity.”

Chudley has his own sailing dinghy and has competed in the National Schools and south west zone events.

But because of the many hours he gives to helping others he does not have the time to pursue competitive sailing at the moment.

In the future, Chudley is hoping to become a dinghy instructor, as well as a national and international race officer.

“I would like to thank the Andrew Simpson Foundation, WPNSA, On Board and my school (Sir John Colfox) for giving me the time and encouraging me, also all the people who have helped me.”

Chudley is now preparing to sail in the Bart’s Bash Race on September 21.

Anyone who wants to help with sponsorship can go to justgiving.com/bb-scott-chudley.

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Malibu Boats: An Opportunity To Ride The U.S. Consumer Wave (MBUU)

Sector: Consumer Discretionary

Industry: Leisure Equipment Products

Investment Report 8/19/2014

Malibu Boats, Inc.

NYSE: MBUU

Brief Description

Malibu Boats, Inc. (NASDAQ:MBUU) designs, manufactures, and markets inboard performance boats used for water sports and general recreational boating. Malibu Boats offers its products under two brands: Malibu (high-end) and Axis Wake Research (low-end). The firm sells its boats through a dealer network, consisting of 116 independent dealers operating at 139 locations across the United States in addition to 49 international dealer locations. Malibu currently holds the leading positions in the U.S. and international performance boat market with 33% and 40%, respectively, in aggregate unit volume as of 9/30/2013. In FY 2013, domestic sales made up 95% of revenues and international sales made up 5% of revenues.

Investment Thesis

As a relatively new entrant into the inboard performance boat market, Malibu Boats has captured market share from entrenched competitors every year since the arrival of the current CEO and CFO, earning itself the number one market position as of FY ’13. In 2009, Malibu made a critical decision to ramp up RD and focus on new product introductions in a time when its competitors were pulling capital from their performance boat segments. This allowed Malibu to build out its dealer network and establish its brand name in the market eventually leading to the leading market position. The firm’s strong brand name, versatile product portfolio, and Apple-like planned obsolescence business model present compelling growth prospects supported by a favorable economic backdrop, and cyclical tailwinds. Our expectations for revenue growth exceed market-implied expectations creating a mispricing opportunity.

1. Favorable Macroeconomic Environment

Using history as a guide and indicators from our consumer interviews, we believe that a favorable economic environment has a significant impact on consumers’ demand for performance boats. With rising levels of consumer sentiment, above average access to credit, and a shift towards consumer releveraging, we believe the environment for purchasing performance boats will be favorable for the foreseeable future. We estimate macro economic conditions contribute ~25% to Malibu’s top line growth

2. Cyclical Performance Boat Recovery

Sales of performance boats hit a trough in 2011 at ~4,800 units, 59% lower than the average annual new unit sales volume of 11,714 observed between 2001 and 2007. We believe there is pent-up demand in the market, as the average age of boats in use has increased to 20+ years today from 15 years in 1997. In a replacement market driven by boat age and available new features, we believe Malibu is well positioned to capitalize on this recovery and estimate industry fundamentals contributing ~60% to our revenue forecast.

3. Competitive Advantages Driving Consumer Demand

Malibu’s widely recognized and respected brand name and proven track record of innovation give the firm leverage over its competitors in a market where sales are mainly driven by word of mouth and grass roots marketing. The firm’s high quality product portfolio, focus on innovation, and product crossover strategy will allow Malibu to capitalize on the growing popularity of wakeboarding and family boating. In aggregate, we believe these factors will drive Malibu to further capture market share from competitors, penetrate other powerboat markets, and expand its dealer network. In our view, market implied growth expectations are grossly under our growth outlook for Malibu and expect the firm’s competitive advantage and strategy to contribute ~15% to growth.

(click to enlarge)

*NOTE – “ASAP” refers to estimates made by Simon Bizien or other analysts within the Applied Security Analysis Program (ASAP)

Competitive Landscape

We consider the ski/wakeboard performance boat market to be in a mature stage with cyclical growth qualities, as the number of firms competing for share has boiled down to three main competitors (Malibu, MasterCraft, and Nautique) and sales are highly dependent on the economic environment.

Malibu has positioned itself as low cost luxury boat provider while delivering quality and performance on par with its competition. Although this industry contains a fair amount of brand loyalty in new purchases, we believe as a new generation of casual wakeboarders enters the market and existing boat users crossover from other powerboat categories, Axis and Malibu brands are poised to gain further momentum in popularity.

We believe the threat of a new entrant into the inboard performance boat market to be low given the incumbents’ supply economies of scale, product differentiation through known brand names, dealer networks, and the technological and design intangibles associated with entry. Malibu, MasterCraft, and Nautique are all popular brands with established professional sponsorships, program partnerships, and fan bases creating a challenging environment for a new entrant.

Driver Analysis

Macroeconomic Momentum

In our talks with dealers and boat users, we found that one of the key buying factors that affects a consumer’s willingness and ability to purchase a performance boat is the current state of the macroeconomic environment. Looking back at the past the past five years, we attribute the depressed levels of annual new unit performance boat sales to high unemployment levels, low consumer confidence, and little access to credit as a result of the financial crisis. Looking forward, consumer sentiment has shown a significant rebound from the depressed levels seen in ’08 and ’09 (see Exhibit 1). We believe higher levels of consumer sentiment drive consumption of durable goods (Exhibit 2) and expect higher levels of consumer spending in the coming years as sentiment remains high. This change in behavior should be favorable for manufacturers of recreational durables such as MBUU.

Exhibit 1

Exhibit 2

(click to enlarge)

Source: Cornerstone Research Source: NMMA and St. Louis Fed Data

Another important factor in gauging consumers’ ability to purchase performance boats is access to credit. New Malibu Axis boats range from $65,000-$120,000 so limited access to credit creates a significant purchasing barrier for consumers needing financing. From conversations with dealers, approximately 60% of new sales involve marine financing while the other 40% are cash deals.

Exhibit 3 showcases a slight slump in banks willingness to make consumer loans over the past two years. While we believe banks will ease their lending standards given acceleration in the economy, if changes to credit remain flat in the short term, above average consumer lending levels should accelerate consumer spending of high price point items such as recreational durables (Exhibit 4).

(click to enlarge)Exhibit 3

Exhibit 4

Source: Cornerstone Research Source: NMMA and St. Louis Fed Data

Exhibit 5 (Source: Cornerstone Research)

Additionally, exhibit 5 portrays a shift away from consumer deleveraging as Q/Q change in consumer debt was mainly positive in 2013 and hit ~$400B in Q3 2013. Improving consumer sentiment, access to credit and releveraging create a favorable economic environment for Malibu which we believe will drive industry volumes and ultimately factor into ~25% of Malibu’s top line growth.

Cyclical Performance Boat Recovery

Although the performance boat market displayed new unit sales growth of 13% from 2011 to 2012, average annual new unit volumes are still 53% below average volume levels in the mid 2000s (exhibit 4). We attribute the past five years sales declines and current trough volumes to a saturated, low average life boat market and increased activity in the used boat market following the financial crisis.

Exhibit 6

After speaking with boat users, dealers, and sell side analysts, we believe the turnover for performance boats is around 5-10 years depending on intended use, boat condition, and availability of new features. Management believes that the recent high activity in the used market has increased the average age of boats in use to 20+ years today from 15 years in 1997.

We conducted a survey of 35 boat users and water sports enthusiasts to gauge consumer/boat demographics, product cycle trends, and brand recognition. Our findings indicate that the distribution of average boat age is skewed older than 5 years. As shown in exhibit 4, ~62% of users’ boats are greater than 5 years old and 23.5% of users’ boats are greater than 10 years old.

Source: ASAP Primary Research

Management has pointed out that the current 1:6 ratio of new to used boat sales should revert to the historical ratio of 1:4 new to used sales as the replacement cycle accelerates. After speaking with sell side analysts covering the leisure sector, we believe that inventory levels in the used performance boat market have tightened due to heavy buying during the post-recession period and a lack of new products from the major boat manufacturers. In addition to this, prices in the used market have tightened to a 10-15% differential vs. the new product. Based on responses to our consumer survey and conversations with industry experts, we believe that low marginal costs of upgrading to a new boat will drive demand for new performance boats.

Exhibit 7

We also believe that the total addressable market for performance sport boats is growing as a result of crossover from other power boat categories. The performance sport boat segment has the potential to capture market share from other segments, as the popularity of wakeboarding and watersports increases (Exhibit 7) and more and more consumers desire luxury boats in the 19-26 foot range. Based on our conversations with boat users and industry analysts, we believe performance boats are starting to appeal to a broader family market looking for a versatile boat that can be used for sports and leisure while having the ability to seat 15-17 people. Performance boats offer the size of traditional runabouts, but deliver performance and versatility non-existent in other segments.

2013 volumes for the outboard and sterndrive categories were ~137k and ~16k, respectively. We believe approximately 5% of outboard and 70% of sterndrive boats are addressable to the performance segment given their fiberglass hulls and 19-26 foot size range. This creates an additional addressable market of ~8000 units for the performance segment. We expect the performance segment to penetrate this additional market going forwards contributing to our to our above consensus industry growth expectations.

Exhibit 8

(click to enlarge)

Given the aging demographic of boats in use, tight used market inventory levels, expected consumer behavior, and expanding addressable market, we believe there will be a significant replacement period in performance boats over the next 5-7 years. Extrapolating trend growth and incorporating market implied and sell-side expectations, we believe the market is expecting the performance volumes to grow by approximately ~11%. We expect 15% annual growth in the performance segment (Exhibit 8) as a result of strong industry fundamentals and an expanding addressable market. With the top market share in the performance boat category, Malibu is strongly positioned to capitalize on this replacement cycle with industry growth contributing to 60% of our growth expectations for the firm. Source: Factset, NMMA

Competitive Advantages Driving Consumer Demand

Business Model

Over the past five years, Malibu has differentiated itself from its competitors and built a strong reputation behind its brand name by focusing on continuous innovation. Post-2009, many boat manufacturers cut RD and stopped coming out with new features and models. We attribute Malibu’s ability to capture nearly 10% of the performance boat market share in the last five years to a combination of their innovation led strategy and a lack of competitor investment. During this time, Malibu was able to significantly expand its dealer network to 139 dealer locations in the U.S., including 18 dealers converted from other manufacturers. Although management’s goal is to penetrate 100% of the dealer market, MBUU has made strides in expanding its dealer network with 60% dealer penetration, up 31% from 2009. Management attributes 475 new sales to the dealer growth experience since 2009 boiling down to an average dealer volume of 15 boats/year. We expect Malibu should be able to further expand its dealer network by an additional 15 locations as a result of the firms growing popularity.

Exhibit 9

(click to enlarge)

After talking to dealers and industry analysts, we believe Malibu’s business model has the potential to mirror an Apple-like planned obsolescence model in which product turnover is driven by new feature introductions generating a form of recurring revenue.

MBUU First to Market Innovations:

  1. Surf Gate: Released in 2012, balances boat weight allowing users to surf on either side of the wake generating a better quality surf wave. Surf Gate won an industry award and is widely popular among athletes and users.
  2. Power Wedge: Released in 2006, allows users to customize the size and shape of the wake. The Power Wedge is widely mimicked by competitors.

Source: Company Filings

New Features/Product Introductions

As a result of the firm’s innovation led strategy, Malibu has been first to market with many industry changing boat features such as the Power Wedge and the Surf Gate. We believe this has been the primary driver of Malibu’s ability to capture an additional ~10% share from 2008 (Exhibit 9). In our conversations with dealers, these innovations have been primary buying factors for many consumers and additionally drive product replacement. While competitors in the industry are known to steal technology thus making it difficult to offer a differentiated product for a prolonged period of time, management has indicated their main focus lies on being first to market with the most cutting edge innovations in order to remain the market leader. MBUU operates in an environment with low capital requirements and their recent equity offering used to wipe out their debt, leaves the firm in a sound financial position. Additionally, RD required to roll out new features and models each year is less than $3M/year leaving MBUU in a position to generate significant free cash flow over for the foreseeable future.

Product Portfolio

Malibu markets its products under two brand names: Malibu (luxury performance boats) and Axis (low cost performance boats). Priced between $55k-$120k, MBUU markets Malibu boats to high-income families and wakeboarding enthusiasts as a luxury performance boat that offers the complete performance watersports and leisure boating experience. Based on our conversations with boat users and industry analysts, we believe Malibu boats will continue to appeal to a core market of consumers demanding performance and features, but also a broader family market looking for a versatile boat that can be used for sports and leisure while having the ability to seat 15-17 people. With such a versatile product offering and strong brand name, we believe Malibu will continue to supply its core market and penetrate the larger sterndrive outboard markets.

Priced in the $40k-$85k range, Malibu markets Axis boats as a low cost high performance wakeboarding boat geared towards the hardcore athlete. Axis boats are essentially a stripped down version of the Malibu Wakesetter that offers the same product quality and performance without all the extra additions of the Wakesetter model. For these reasons, many younger wakeboarding enthusiasts without the disposable income to afford Malibu’s higher end models have latched onto this brand. In our talks with boat users, we spoke with an owner of a new Axis boat that was extremely pleased with the product and another consumer that was set on purchasing an Axis boat in the near future. While introducing the Axis brand created the threat of product cannibalization, management has pointed out that the two brands are marketed towards different target markets and this has become a reality as sales of both brands have been quickly growing. Additionally, our interviews reveal that Axis buyers consistently opt for additional features, such as the Surf Gate, at a rate of ~99% supporting average price levels of ~$50k. We believe MBUU’s broadly appealing product portfolio and high add-on option rates will support growth in unit volumes and average sales price throughout the performance boat replacement cycle.

Increasing Wakeboarding/Wakesurfing Popularity

Exhibit 6: Trends in Wakeboarding Popularity

Malibu’s products are directly dependent on the popularity and continuity of wakeboarding as a sport and pastime. Given this, any significant popularity shift away or towards wakeboarding should have an unfavorable or favorable effect on consumer demand. In our conversations with athletes, boat users, dealers, and industry analysts, it was very apparent that wakeboarding as a sport and recreational past time is rapidly growing in popularity. In our survey, 49% of respondents believe the sport is gaining in popularity and only 6% believed the sport was in decline.

Josh Magill, head of the UW-Madison wakeboarding team, pointed towards an increase in nationally televised wakeboarding events (such as the Red Bull Wake Open sponsored by Malibu) and a lack of professional water skiers as indicators of the sport’s growth. Source: ASAP Primary Research.

Magill believes that wakeboarding is capturing what’s remaining of the attention around water-skiing just as snowboarding outgrew skiing.

As a result of the growing popularity of wakeboarding and wakesurfing, Malibu is poised to see accelerated revenue growth as its target addressable market grows. We attribute 15% of our growth forecast for Malibu to the firms competitive advantage.

Valuation

My base case DCF valuation implies a per share value of $28 yielding ~47% upside. Additionally, the stock looks cheap trading at 19x my 2015 EPS estimates given MBUU’s low-mid 20% growth profile and competitive advantage.

(click to enlarge)

Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in MBUU over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. (More…)


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Learn to shoot and edit boat videos at MDCE 2014

MINNEAPOLIS — Video has become one of the most powerful marketing tools available to today’s dealers. By learning to use this tool more effectively, dealerships are likely to see a much bigger payoff, both in terms of increased online traffic and boots through the door.

At the 2014 Marine Dealer Conference Expo, taking place Nov. 16-19 in Orlando, Fla., participants in Lenny Rudow’s workshop, “Shooting and Editing Boat Walk-Through Videos,” will learn the ins and outs of filming video and how to use it to sell more boats. First, dealers will discover the best ways to shoot a walk-through video on a trailerable boat, including a live camera equipment demonstration. Then, workshop attendees will glean the latest video editing tips and tricks, including how to use YouTube’s built-in editor, to make videos more effective and impactful.

Dealers will walk away from Rudow’s workshop with tip sheets they can take back to their businesses to help them film and edit boat walk-through videos that will attract more consumer attention and win more sales. The workshop takes place Monday, Nov. 17 from 9:45 to 11:15 a.m. ET as part of MDCE’s Pre-Conference Workshops.

“Statistics show that website visitors who view video spend more time on the retailer’s website and are far more likely to purchase than other site visitors,” explains Liz Walz, director of education for the Marine Retailers Association of the Americas, which produces the annual event in partnership with Boating Industry. “The more professional the video, the better the results. That’s why we’re convinced this workshop will be so valuable to attendees.”

In 2014, other workshop topics will include leadership, sales, marketing, social media, succession planning, and the service department. Each workshop will feature takeaways (job descriptions, workbooks/guidebooks, report cards, tip sheets, etc.) to help attendees implement what they learned in the pre-conference sessions without delay upon returning to their respective dealerships.

“With more than two decades of experience writing, editing and filming in the boating industry, Lenny is uniquely qualified to help MDCE attendees improve their video skills,” says Boating Industry editor-in-chief Jonathan Sweet. “Video has rapidly become a key marketing tool for dealers, and we are fortunate to have Lenny at the helm, guiding MDCE attendees towards the best strategies for creating and posting their own online videos.”

The 2014 MDCE will offer 30 educational sessions in all, the most the event has ever offered, including seven Pre-Conference Workshops. The conference has traditionally included three educational tracks, but in 2014, it has expanded to four tracks: Leadership, Sales, Marketing and Service Plus. A Closing Keynote address also has been added this year.

Pre-Conference Workshop seating is limited and is available on a first come, first served basis. Attendees can select the workshop(s) they wish to attend during the MDCE registration process and pay an additional fee. Discounts are available for MRAA retail members.

The MDCE is scheduled for Nov. 16-19 at the Orange County Convention Center in Orlando, Fla. It has attracted an increasing number of dealers every year since 2007. In 2013, MDCE featured double-digit growth in dealer attendance, for a total of 615 marine retail professionals. MRAA’s goal is to grow the event to more than 1,000 dealer attendees. To learn more, visit MRAA.com/MDCE.


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