Archive for » March 1st, 2016«

Fire destroys hundreds of boats at Portland storage warehouse

PORTLAND, Ore. —  A preliminary damage estimate for the  Sundance Marina fire on Hayden Island was put at $24 million Tuesday by investigators for the Portland Fire Rescue Bureau.

Fire crews on Tuesday continued to monitor smoldering hot spots and clean up the remnants of the massive fire that damaged hundreds of yachts and boats at the marina’s warehouse. The cause has not been determined.

Fire investigators hoped to start  working through the rubble Tuesday. Backhoes were removing debris but crews still had not entered late Tuesday morning. 

The 300-foot-long warehouse, filled with approximately 350 vessels, some stacked on top of each other, was the scene of a fully-involved fire from late Sunday into Monday morning.

A PFR spokesman for said the first 911 call came from the owners of Sundance Yacht Sales and Marina, at 570 NE Tomahawk Island Dr., just before 10:30 p.m.

Many boat owners arrived at the marina facility in shock over the loss of their property.  For many, boating is a major part of their lives.

 

Boat owner Paul Beppler found out about the fire from watching the morning news.

“It’s that moment in time where you say ‘This can’t be happening. It must be a bad dream,’” he said. “And nope, not a dream. It’s the real deal.”

He’s stored his 27-foot Maxim there for 15 years. It was kept up front.

When he saw video of flames coming through windows and walls collapsing, he knew it didn’t stand a chance.

“It was just shocking to see it, how big the flames were,” said Beppler. “Three-hundred and fifty boats in there, and poof! All gone.”

Bepper, who said his boat was insured, added that owners of the warehouse told him there was “nothing left”.

 

Photos: Fire engulfs Sundance Marina on Hayden Island


  •  A four-alarm fire destroyed a Sundance Marina warehouse holding an estimated 350 boats. Credit KGW Sky 8
  •  A four-alarm fire destroyed the Sundance Marina boat storage warehouse on Hayden Island. There were about 350 boats stacked inside the building.  Credit Portland Fire  Rescue Bureau
  •  KGW's Sky 8 over the Sundance Marina fire on Hayden Island.
  •  KGW's Sky 8 over the Sundance Marina fire.
  •  A screen grab of a KGW livestream from the Sundance Marina fire.
  •  Portland Fire  Rescue Bureau

In all, 26 crews from Portland and Vancouver responded, including two fireboats, which supplied firefighters with water from the Columbia River after the island’s supply ran dry.

For hours, they fought flames exclusively from the outside, as it wasn’t safe to go in.

Firefighters said no one was inside when the fire started and there were no reports of injuries.

There was no word on what sparked the flames in the first place. An official tally of how many vessels were damaged was not immediately available, but the warehouse reportedly housed more than 300 boats.

Sundance Yachts released the following statement on its website:

Last night (Sunday night) there was a fire after hours at Sundance in Portland. There was no one in the building at the time, and no one was hurt. We do not yet know the extent of the damage, as we have not been able to enter the building. We expect to be very busy starting Monday fielding requests for information. At this point we have many of the same questions you likely do. As soon as we learn more we will share the details. Thank you for your understanding as we work through this. If you have questions you can email them to portland@sundanceyachts.com

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I Don’t Want To Like Malibu Boats… But I Do

I like the water but am not on it as much as I’d like; working on Malibu Boats (NASDAQ:MBUU) allowed me to watch lots of wake sports videos on YouTube and daydream about owning a boat, while maintaining the illusion that I was actually being productive and getting stuff done. Jokes aside, Malibu is a niche, illiquid, and underfollowed company that seems to be trading rather inexpensively relative to its potential. There’s definitely a learning curve here, but with the potential for Malibu to become the Polaris (NYSE:PII) of the water, I think it’s one that investors should research further even if, like me, you’re shy about owning consumer discretionary names.

Strong Performance So Far…

Weakness in Canada and other oil-patch markets has weighed on peer powersports companies such as Polaris and Arctic Cat (NASDAQ:ACAT), and Malibu sold off in concert with those names until bouncing back after strong earnings. For the first half of FY16, with the caveat that CQ4/FQ2 is seasonally low, sales were up 14%, driven by an 11% increase in unit volumes and a more modest increase in ASPs (net sales per unit were up from $67,857 to $69,590). For the full year, the company continues to expect mid to high single-digit unit volume increase, with low to mid single-digit net sales per unit. Despite the strong revenue growth, margin growth has been somewhat muted by Canadian and Australian currencies.

These results continue a multi-year track record of growth that is due to both secular tailwinds and good execution by Malibu. We’ll take each in turn.

Market Recovering… And Weather A Tailwind

Being highly discretionary, performance boat purchases were jettisoned by consumers through the financial crisis:

Click to enlarge

Source: Malibu Investor Presentation

Indexing to the last peak seems aggressive, since easy HELOC money enticed consumers to finance lots of expensive purchases (boats, home theater systems, kitchen renovations, what have you) that they might not have otherwise made. With this being the most-hated economic recovery in a long time, I’m not sure the cultural zeitgeist supports a return to free-wheeling debt-fueled purchase of big-ticket discretionary items. For some context, high-end Malibu boats can cost more than an Audi R8, and even the “entry-level” Axis boats still retail from $45,000-$85,000 – hardly an impulse buy.

In fact, on this pricing point: after wandering around on some boating forums, there are some very valid concerns to take into account. The discussion here on “themalibucrew.com” – from Malibu enthusiasts – was particularly interesting. Given where interest rates are today, it’s very cheap to finance boats (allowing manufacturers and dealers to push price). According to several of the forum posters, prices have risen quite substantially over the past decade to the point where middle-class families or younger consumers may be priced out of the market (even with the lower-end Axis boats). It’s sort of difficult to get any handle on elasticity of demand, but from an analytical perspective, I do think it’s worth disaggregating unit volume from ASP growth, as I believe the former is much more likely to be sustainable than the latter.

In any event, the unit growth trend seems to be supported at least directionally. Even if you index the next peak to somewhere around the number of boats sold in the 2001-2002 recession, there would seem to be at least a four- or five-year runway of mid to high single-digit growth (absent any substantial macroeconomic deterioration). Further, wake sports (a major use of performance boats) seem to fit well in the general health/wellness/”active” secular trend.

Particularly interesting to me, and perhaps somewhat overlooked by investors, is the extent to which weather may actually be a tailwind to its business over the near term. How do I mean? The California drought is well known (and that market, once Malibu’s #1, is still down pretty big) but Texas, another big market for Malibu, was quietly struggling under its own severe drought as well. When your lakes are so low that public boat ramps can’t be safely utilized, it tends to have a dampening effect on boat sales. While there are many examples, the one that comes to mind is Lake Travis near Austin, which is/was a very popular boating destination but looked like this:

Honestly, the last time I saw it, I turned to the person I was with and asked, “wait, this is supposed to be a lake?” It wasn’t that bad throughout, of course, but it was still pretty dry, leaving many of the access points on dry land.

Just a few years ago, with the lake dipping as low as 30% full, journalists claimed it would take “an insane amount of rain” for Travis and its chain of lakes to recover. Well, while almost everyone (particularly those in the construction industry) lamented the record-setting rains in Texas last year, those rains filled up some lakes. Lake Travis is now at 89% of capacity, and one of the big boating lakes actually flooded over its causeway, causing substantial damage to park facilities and shutting down several roads. Some of the lakes out in West Texas are still pretty dry, but at least better than they used to be – although as I referenced earlier, this is likely to be a weak market in the near term anyway.

Notwithstanding oil prices, Malibu dealers in Texas “are having some of the best years they’ve ever had” (per management in November), with strength even in energy-levered Houston. With lake levels high enough for people to actually get their boats in the lake, Texas should be an area of strength in 2016 and 2017. With some moisture in California, which is down several hundred units from Texas (versus formerly being the biggest market in the country), management is optimistic about that market as well. Malibu has plenty of capacity to continue to expand (roughly 40%, to 5,000 units), and could take that up another 1,000 units with some modest investment if necessary.

Market Share Growth Driven By Innovation

Within the context of a generally improving performance boat market, Malibu seems pretty well-positioned. My friend who spends his summers in and around boats described Malibus as “great” and “some of the best.” His consumer opinion is backed up by the empirical data; the company has grown its U.S. market share pretty substantially, from 23% in 2008 to the low 30s today (and even higher globally). While market share this year will likely be down slightly, the company is looking to continue gaining share (albeit at a more modest pace) in future years. Nautique also gained a couple points of share, but nothing close to what Malibu gained; MasterCraft, which used to be #1, is now a distant #2.

The share gains have been driven by innovation. Some features are salient: Malibu’s Surf Gate and Power Wedge significantly enhance the quality and customizability of the wake. While the high end of this innovation gets put on the premium-priced Malibu boats, the Axis brand (launched in 2009) has rapidly grown and benefits from the innovative feature set developed for the high-end boats. Malibu is now entering the super-premium market (where it currently has no offerings) with the M235.

Some of the innovation, on the other hand, is less flashy and more pedestrian – but equally valuable. Malibu recently introduced a drain plug sensor to alert owners via the dashboard if the drain plug is left out – not dissimilar to the “door open” light in your car. While this may sound somewhat trivial, it’s actually not – forgetting to install the drain plug is a frequent cause of boat damage. (Here, for example, is a video of a Malibu 247 that filled with water and was significantly damaged thanks to a drain plug left open.)

While this innovation can obviously be copied, and there are a number of other strong performance boat brands that have their own loyal followings, it seems to me at first glance that Malibu will be able to defend the market share it has taken (even if it can’t expand it quite as rapidly, or at all, going forward). Further, the company is focused on defending its intellectual property – in 2013, Malibu filed suit against Nautique for patent infringement and won that case (resulting in a royalty agreement). Today, the company has another suit ongoing against MasterCraft; if it ends up winning this suit too, that would speak pretty strongly to the strength of Malibu’s RD relative to competitors’.

Valuation

Malibu has an extremely odd capital stack due to LLC ownership interests, an exact description of which is beyond the scope of this article (please refer to SEC filings). It includes an “Adjusted Fully Distributed Net Income” figure that essentially translates the LLC interests into Malibu shares and applies a flat tax rate; there are a number of other adjustments, but these and stock-based comp don’t look horribly egregious. Painting with broad strokes here, given strong revenue growth and flattish margins, I expect the adjusted income number to exceed last year’s, perhaps significantly. I still need to run more detailed calculations here, but at first glance, I’m inclined to be bullish – even if the company only posted $1.20/share, that would seem to justify a price significantly higher than $15-$16. (Debt of $68 million should be considered, but does not immediately seem excessive in context of $45 million of adjusted EBITDA.) The stock has run up pretty significantly since earnings, but if the company can sustain mid to high single-digit revenue growth over the next few years – seemingly not too tall of a hurdle – then a share price in the low $20s wouldn’t be unreasonable, leaving plenty of potential upside from here.

One of several outstanding questions for me (there are lots of due diligence type things – warranty, visiting a local dealership, etc.) is whether Malibu can become the equivalent of Polaris in the water. It’s one thing to be a leader in terms of product, and quite another to be a strong capital allocator creating exceptional long-term value for shareholders. The company has aggressive long-term targets for revenue growth, EPS growth, and adjusted EBITDA, but targets are easy – execution is much harder. The business has done very well since 2008, but given that this is still a highly discretionary industry where demand could evaporate overnight, there’s good reason to take your time and be cautious.

Wrapping It Up

A lot of times, there are names I want to like but can’t. Malibu is seemingly the opposite: a name that I don’t want to like (given that it’s so discretionary and high up the Maslow pyramid) but kind of do. Despite the post earnings run-up, there still appears to be meaningful potential for upside here, and I’m inclined to spend more of my time conducting further due diligence on Malibu relative to other new names on my watchlist.

Disclaimer: Investing is inherently subjective and this article expresses opinions. Any investment involves substantial risks, including the complete loss of capital. Any forecasts or estimates are for illustrative purpose only. Use of this opinion is at your own risk and proper due diligence should be done prior to making any investment decision. Positions in securities mentioned are disclosed; however, the author may continue to transact in any securities without further disclosure.

This is not an offer to sell or a solicitation of an offer to buy any security. All expressions of opinion are subject to change without notice and the author does not undertake to update or supplement this piece or any of the information contained herein. All the information presented is presented “as is,” without warranty of any kind. The author makes no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use.


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