While several large-cap names have enjoyed solid share-price performance for the year on the back of a near 10% year-to-date performance for the S&P-500 (SPY), returns have been quite bifurcated between small-caps and large-caps, and especially those small caps with sub $1.0 billion valuations.
This is evidenced by the iShares Russell MicroCap Index Fund ETF (IWC) being down 6% year-to-date, underperforming the S&P-500 by nearly 1500 basis points in just four months.
In fact, global small-caps are trading at their lowest multiples since the Great Financial Crisis and even below the multiples of March 2020.
This setup has made fishing in the small-cap and sub $1.0 billion market cap space quite attractive as long as one chooses to stick to quality and is careful what they are buying.
An Opportunity For Patient Investors
MarineMax (HZO) is a retail company in the Leisure Sector and specifically the boating space that was founded in 1998 with its headquarters in Clearwater, Florida.
It is the world’s largest retailer of recreational boats and yachts that generated over $2.3 billion in net sales last year with strong gross margins of 35%.
The company has over 125 locations globally (57 owned or operated marinas and 78 dealerships), giving it a valuable real estate portfolio that is valued at $26.00 per share on a book value basis. Notably, this figure covers 90% of the company’s market cap.
MarineMax’s two major segments are its retail operations and product manufacturing, with the former making up approximately 90% of total revenue, and recent acquisitions have helped to increase the company’s margins and made it less reliant on new boat sales, a helpful pivot given that we’ve headed into a less favorable economic environment.
However, despite insulating the business with increased revenue from technology and diversification in its portfolio, the company has made two negative revisions to FY2022 guidance since it was provided last year, with the most recent cut being quite significant.
In fact, annual EPS was revised down to $4.90-$5.50 this year, implying a 40% plus decline year-over-year from record annual EPS of $9.07 in FY2022.
The Fundamentals
MarineMax reported earnings last week and while it reported record gross margins revenue fell 7% year-over-year to $570.3 million, quarterly earnings per share plunged 49% to $1.23, and the guidance midpoint was slashed yet again.
While this is certainly disappointing and the company hasn’t done a great job of baking in enough conservatism given the challenging macro outlook, it’s important to note that the stock is trading at one of the lowest earnings multiple of any small-cap stock on the US Market, currently trading at just ~5.1x FY2023 earnings estimates.
This is a 65% discount to its historical multiple of 14.5x earnings and a 57% discount to its 10-year average multiple of 11.9.
This suggests that this miss was more than priced into the stock and it’s also positive that forward estimates have now declined sufficiently to the point that we could see an upside surprise.
In my view, this is an opportunity for patient investors, and especially those looking out past the other side of this tougher macro environment with the potential for HZO to earn upwards of $8.00 per share post-2026 given the accretive acquisitions done over the past few years to embolden its portfolio.
The Technical Picture
MarineMax wouldn’t appeal to trend followers given its current technical setup, with the stock continuing to make lower lows and lower highs over the past year and recently making a new 2-year low below $26.00 per share following its fiscal Q2 earnings report.
However, the stock saw a bullish outside reversal after the ugly open, suggesting that the weaker than expected fiscal Q2 earnings were already priced in.
See the Full Technical Analysis Report for HZO
Additionally, the stock has pulled all the way back to a multi-year support level at $26.00-$27.00, which was prior resistance in 2018 and 2020.
While there’s no guarantee that this prior resistance level becomes new support, this has provided a very attractive reward/risk setup, with just $2.00 in downside towards a potential major support level and no strong resistance until $36.00, translating to a reward/risk ratio of 4.0 to 1.0.
Additionally, the stock has recently regained its 20-day moving average which has begun to curl up, suggesting a potential positive change in momentum if it can remain above this moving average for two weeks which would confirm a positive shift in the stock’s character.
So, with the stock retesting a past breakout and trading at its most attractive valuation in years, any positive change in sentiment could quickly push the stock back above $35.00 closer to fair value, especially given its high short interest.
The Bottom Line
Based on what I believe to be a conservative earnings multiple of 8.0 (10-year average: 11.9) and FY2024 annual EPS estimates of $4.70, I see a fair value for HZO of $37.60.
This points to a 34% upside from current levels and this fair value estimate is based on trough earnings in FY2024, with annual EPS expected to rebound to $6.00 in FY2025 based on current estimates.
Hence, I see this 18-month price target as very achievable and I see this as a very attractive entry point from a long-term standpoint with a path back to record annual EPS post-2026 in a more favorable economic environment.
In summary, I see HZO as a steal below $28.00 and would consider adding to my position if the stock can breakout above $30.50 on a daily closing basis.
Disclosure: I am long HZO
The above analysis of MarineMax (HZO) was provided by financial writer Taylor Dart. Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
Is MarineMax (HZO) A Buy or Sell?
Based on MarketClub’s technical analysis tools, MarineMax (HZO) is showing signs of short-term weakness, but still remains in the confines of a long-term uptrend. Keep an eye on HZO as it may be in the beginning stages of a reversal.
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