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MasterCraft Boat Holdings, Inc. (NASDAQ: MCFT) did not avoid the scourge of the pandemic. But he was able to resist the stormy market environment and regain his footing. This has shown more promise as health and safety restrictions have eased. Today it remains an enduring figure in the yachting industry. Revenue and revenue growth is evident, and could intensify in the spring and summer.

Meanwhile, the stock price is in a downtrend, showing its undervaluation. In addition, inflation may continue to influence the performance of its shares. But the boom in outdoor recreation could help the company follow the trend of this exercise. Thanks to pent-up demand, which corresponds to its strategic increase in production. Growth prospects remain promising, which could cushion the impact of inflationary pressures.

Business Performance

MasterCraft Boat Holdings, Inc. did not have a successful 2020 as the pandemic disrupted its supply chain. Its limited operating capacity caused production and operating revenues to fall by 23%. The contraction in margins is also evident, although it remains above 20%. If we focused on core operations, the business would still be profitable. She was able to keep her costs and expenses down despite the market disruptions.

The company’s effective asset management has helped it bounce back in 2021. This has coincided with the easing of restrictions and pent-up demand for outdoor recreation. The boating industry in the United States experienced a rebound in sales, which were 7% above the five-year average. The recreational boating market has experienced the highest growth rate. Thanks to the influx of customers in outdoor recreation. Motorboats sold topped 300,000 units, the second time this had happened in fifteen years. MasterCraft Boat also showed a quick recovery. Revenue was $525 million, 37% above the five-year average of $384 million. Its operating margin increased to 14%, improving efficiency within greater operating capacity.

Operating revenue

Operating revenue (Market watch)

Operating margin

Operating margin (Market watch)

Today, she is seeing better results as the pandemic scare subsides. The easing of restrictions and the reopening of borders make outdoor recreation a must. The trend is timely, as spring and summer attract more boaters. Its accumulated operating revenue is already $303 million, a 36% year-over-year growth. Indeed, it continues to support its growth amid market developments. It attracts more demand and caters to more customers as its production capacity increased by 14.6% in 2Q 2022.

At the same time, inflationary pressures have an impact on production. The rise in the price of oil and gas has a domino effect on its demand. Additionally, supply chain issues persist, so product delivery is becoming more expensive. Nevertheless, it shows sustained profitability with a net profit of 15.4 million dollars, an annual growth of 17%. This makes 2Q 2022 the most profitable second quarter in history.

Despite the challenges, more growth prospects are to be expected. There is a massive upward trend in travel and leisure. Travel spending this year is already close to pre-pandemic levels. Thus, there is a continued resumption of outdoor activities, including boating. The larger operating capacity and revenues show that there is still more to look forward to. Once supply chain issues are addressed, core operations will run more smoothly.

In addition, MasterCraft Boat continues to innovate for a better experience and fuel economy. With its new tow motor, every customer can have a smoother and more responsive boat ride. This strategic decision corresponds to the boom in outdoor activities this spring and summer. Its increased wholesale visibility may also allow it to capture more demand. This combination will help the company cushion the blow of inflation.

The company expects 25% revenue growth this fiscal year. It is in line with the average growth of the first half, which makes the outlook realistic. Meanwhile, my projection is at 17-20%. I think the growth can remain substantial. But inflation could still be tough in the second half of fiscal 2022. I expect operating revenue to grow to $614-630 million in this fiscal year. In the 2023-2026 financial year, it could reach 706 to 911 million dollars.

Operating revenue

Operating revenue (Tips from the company and estimate from the author)

Operating revenue

Operating revenue (Author’s estimate)

What Helps MasterCraft Achieve Goals

The boating industry faces many inflationary pressures. MasterCraft is no exception. But the pent-up demand for outdoor recreation this spring and summer can help. In addition, its greater operating capacity allows it to increase its visibility on the market.

He becomes more capable of increasing his production and generating more income. It proves successful as it outperforms its major peers by 80 to 300 basis points. Thus, it remains the leading manufacturer of ski-wake. It’s no wonder that it continues to capture more of the market share. Compared to its main competitors, it shows the highest increase in market share. Better still, profitability remains high, demonstrating the effectiveness of its asset management in a context of expansion.

Market share

Market share (Second Quarter Earnings Conference Call)

With its greater capacity and higher income, it has more means to innovate its products. Its new tug engine provides customers with a better boat experience. Fuel economy and more responsive boat rides make the price reasonable. Besides, it redesigned XT2022 with more powerful performance and customization. The 150 KW power tugs are also another impressive feature of the boat. So, as the market sees more and more boaters, MasterCraft is evolving to stay ahead of the competition. Increased market presence coupled with continuous innovation makes its optimistic outlook achievable.

In addition, MasterCraft Boat strengthens its position in the market with its solid and intact fundamentals. Cash inflows and borrowings remained stable as it increased its operating capacity. Cash decreased due to the substantial increase in inventories. But it also made loan writedowns and stock buybacks of $9.9 million. While the company increased its production level by 14.6%, it also reduced its financial leverage.

It can be confirmed in its cash flow statement using the value of operating cash flow and free cash flow (FCF). In 1Q 2022, there is a substantial increase in current assets. This was most evident in inventories at 43%. This can be seen in changes in working capital, as they have led to more cash outflows. The increase seems like a wise move as FCF in Q2 2022 almost quadrupled to $23 million. The high cash flow can verify that the quarter is the most profitable in history.

While the cumulative value of FCF is slightly less than $5.5 million, the 3rd and 4th quarters can compensate for the decline. It is in line with the increase in revenue and revenue for the business. Today, he maintains his level of production. Thus, working capital and CapEx will remain similar to the value of the first half. With that, I expect the FCF to sales ratio to stay between 7 and 8%. The FCF could therefore reach 51 to 74 million dollars for the next five years.

Free movement of capital

Free movement of capital (Author’s estimate)

Price estimation

MCFT’s stock price has moved sideways over the past year. After its plunge to $22.49 on April 7, it is slightly bullish today. Inflationary pressures and supply chain issues have affected recent price movements. At $24.54 today, it does not yet promise a sustained rise. And if we check the pre-pandemic trend, it has already rebounded. But, it still looks cheap, considering its PE ratio of 7.79. It trails its competitor, Malibu Boats, Inc. (MBUU), with 8.48. Likewise, its PE ratio of 0.74 shows that it is also a desirable stock and below the MBUU with 0.98. To check for potential undervaluation, I used the DCF model using the FCFF method.

FCFF

38,000,000

Cash and equivalents

12,000,000

Loans in progress

32,000,000

Growth rate to infinity

4.00

WACC

8.80

Common shares outstanding

18,800,000

share price

$24.54

Derived value

$43.80

Given this, the stock price is still 44% undervalued. It seems to match the slight rise of the last two weeks. The price may increase for the next twelve months. Also, it adheres to the optimistic view as seen in the PE and PS ratios. But external factors such as the supply chain and inflation must always be taken into account.

Conclusion

MasterCraft Boat Holdings, Inc. continues to dominate the boating industry. Its financial performance remains consistent with attractive growth prospects. The strategic positioning of the market and its stable fundamentals make it a serious competitor. Despite supply chain challenges and inflation, it remains viable and sustainable. Meanwhile, the stock price continues to move sideways with no promise of an upside soon. But considering the potential undervaluation and market opportunities, it remains cheap. The recommendation is that MCFT is always a buy.