OneWater Marine (NASDAQ:ONEW) is a premium boating retailer that’s down over 44% YTD and is hovering round its 52-week low. Despite issuing sturdy steerage for FY 2022, the inventory has been punished by the shifts in market sentiment. Management has a well-planned and articulated technique that’s getting ready the corporate to raised handle an financial downturn. I maintain an extended place in ONEW and shall be watching over the subsequent quarters so as to add to my place if administration exhibits its technique is working.
A Fragmented Opportunity
The US boating retail market largely consists of small, impartial retailers (over 4,000 nationwide), with most house owners working lower than 4 places. Many of those impartial retailers supply restricted manufacturers, restricted Finance and Insurance (F&I) merchandise, and primarily concentrate on new boat gross sales.
The US Boating market itself can be big and has been slowly rising for years. With COVID driving folks to hunt a secure outside exercise, boating gross sales jumped 19% YoY to over $49 billion in 2020 gross sales. Outlooks present the boating trade will proceed to develop at a 6.5% CAGR between 2021 and 2027.
This is now the place OneWater Marine is available in. At lower than 3% of complete trade gross sales, OneWater Marine is a quickly rising premium boating retailer providing new and pre-owned boats, F&I merchandise, restore and upkeep service, and elements and equipment. OneWater was fashioned in 2014 as a mixture of two boating retailers with a mixed 19 retail places. Since then, OneWater Marine has expanded to 75 retail places, 8 distribution warehouses, and numerous on-line shops together with Boatsforsale.com that it acquired and developed in 2020.
Buyer of Choice – The Acquisition Strategy
ONEW designed its technique across the fragmented US boating retail market. Its most important technique is to seek out good acquisitions and combine them into the OneWater ecosystem, which incorporates optimizing their operations and offering the economies of scale of a giant group. The first key to this technique is the objective to be the “buyer of choice” when an impartial retailer needs to promote its shops. In the 2021 This fall 10-Ok, administration says the next:
We have an intensive acquisition monitor document throughout the retail marine trade and consider we’ve developed a fame for treating sellers and their employees in an trustworthy and honest method. We usually retain the administration group and identify of the acquired group. We consider this apply preserves buyer relationships and goodwill within the native market. We consider our fame and scale have positioned us as a purchaser of alternative for marine retailers who wish to promote their companies. To date, 100% of our acquisitions have been sourced from inbound inquiries, and the variety of annual inquiries we obtain has persistently elevated over time.
The administration needs impartial retailers to wish to promote to OneWater. When it acquires a location, it retains the placement identify, it retains the administration group, and it helps the placement develop. It is a win-win for OneWater and the previous house owners. OneWater additionally doesn’t must rebrand places or construct a nationwide model. Former house owners can be ok with the transition, the place staff are stored, the placement will get help to develop, and the enterprise they constructed for years retains its identify.
Once acquired, the places are shortly built-in into the OneWater ecosystem. The back-office integration usually takes 10 days and full integration usually completes in 45 days. The acquired places now have entry to stock throughout the complete OneWater firm, entry to extra manufacturers, higher F&I merchandise, and worker coaching. With the assets of a giant firm, the placement can now drive higher profitability and buyer satisfaction by new merchandise and serving to clients discover a boat that greatest matches their wants.
The enhancements don’t cease on the gross sales flooring. Acquired places even have improved flooring plan pricing, higher relationships with producers, and entry to ONEW’s advertising and marketing group. Using information from all places, ONEW can develop focused advertising and marketing methods and enhance stock administration.
And with the extremely fragmented market, there are numerous places for OneWater to accumulate. From the 2022 Q1 Earnings Call, Austin Singleton mentioned:
Our acquisition pipeline for 2022 is powerful and can proceed to be a core element of our general technique. While the alternatives are plentiful, we’re dedicated to our disciplined strategy, choosing targets that meaningfully drive progress, diversification and are in step with our objectives. We consider our acquisition technique considerably provides to the incomes potential of the corporate.
Diversity by Brands and Locations
Diversifying is a typical theme in OneWater Marines’ technique, and it continues into each location choice and types. ONEW has many places spanning completely different climates, areas, and salt and freshwater. With places in several areas, impacts of localized climate are minimized. OneWater additionally targets areas with sturdy boating cultures. Florida and Texas are the 2 largest markets for boating and ONEW has a powerful presence in each markets, along with a presence in eight of the highest 20 states for retail boating expenditures.
OneWater additionally has a bonus with producers, as its measurement permits it to keep up higher relationships with manufacturers and supply extra decisions in comparison with smaller retailers. It carries over 68 boat manufacturers and consider it’s a high 3 buyer for 26 of these manufacturers and the biggest buyer for its 5 highest-selling manufacturers. Only a type of manufacturers accounts for greater than 10% of ONEW’s income. Here is what administration mentioned within the 2022 Annual Report:
Our stock and product choice enable us to cater to a extremely various buyer base with value factors and boat varieties that enchantment to a broad spectrum of budgets and preferences. The boating trade’s and MarineMax’s common promoting costs for a brand new boat had been $60,000 in calendar 12 months 2020 and $227,000 in fiscal 12 months 2021, respectively. By comparability, our common promoting value for a brand new boat in fiscal 12 months 2021 was $160,000.
Revenue
Through ONEW’s disciplined and strategic acquisition technique, it has skilled sturdy income progress since 2017, as proven within the chart under. Note that for the TTM information, which I calculated from ONEW’s quarterly earnings, that the ten% YoY progress is calculated towards the FY2021 information occurring simply 1 quarter earlier.
In the next chart, the seasonality of ONEW’s quarterly income is seen with Q1 usually being the weakest and Q3 the strongest. We may see Gross Margins rising by improved merchandise and higher stock administration. Additionally, administration is working to broaden elements and repair, as this income is increased margin and usually will increase throughout instances of financial uncertainty. OneWater is increasing elements and companies by buying places that concentrate on elements and repair, concentrating on two to 4 elements and repair acquisitions per 12 months, and utilizing expertise to achieve out to clients about companies.
EPS and Valuation
EPS has grown 116% from a diluted TTM worth of $3.55 in Q1 2021 to $7.67 in Q1 2022. During the 2022 Q1 Earnings, the corporate guided to an EPS of $8 to $8.40 per share. While that is predicting slower progress, it doesn’t contemplate any potential future acquisitions, which might considerably develop EPS. We have already talked about administration is concentrating on two to 4 elements and repair acquisitions per 12 months on high of dealership acquisitions.
The low finish of ONEW’s steerage additionally means the corporate is buying and selling at a fwd. P/E of 4.1, giving it one of many lowest fwd. P/E ratios in its trade. At this low valuation, the market is solely not rewarding this firm, its technique, or its progress. MarineMax (HZO), one in every of OneWater’s closest publicly traded rivals, presently trades at a fwd. P/E of 5.29. While that is additionally a low P/E, giving ONEW this similar ratio supplies a share value of $42.32, an upside of over 25%.
Additionally, on March thirty first, OneWater introduced a $50 MM share repurchase program. At the time, the share value was $34.34 and represents a buyback of over 1.4 MM shares. As we are going to focus on within the subsequent part, there are 15.28 MM shares between the share lessons, giving this repurchase the potential to cut back the share rely by over 9%.
I consider this share buyback program shouldn’t be solely an indication that administration sees continued sturdy EPS values, however that this is a chance to repurchase shares at a low valuation. Recall that in June of 2021, administration elected to offer a particular dividend of $1.80 per share as a substitute of buybacks.
Speaking of dividends, we are going to possible by no means see an everyday dividend as that is restricted in its Inventory Financing Agreement. For the June 2021 particular dividend, the administration acquired permission from its lenders.
Dilution
Since changing into a public firm, the diluted share rely has elevated over 125%. Shocked on the enhance, I feared the fixed acquisitions had been diluting shareholders, so I dug deeper.
Most of this dilution is from share redemptions between share lessons. ONEW entered the market with two share lessons. Class A shares are the frequent shares we will all purchase. They grant the holder a vote for each share and financial curiosity in ONEW.
Class B shares are a remnant of the formation of OneWater Marine, Inc. and represented possession in OneWater, LLC. Class B shares are usually not obtainable on a public market, have 1 vote per share, and don’t have any financial curiosity in ONEW. For instance, Class B shareholders wouldn’t obtain any dividends. Holders of Class B shares can redeem them for Class A shares, which is what we’ve been witnessing with the rising share rely.
In the chart under, you possibly can see diluted shares went from 6 MM to 13.76 MM since Q2 2020. Most of this enhance is from exchanging Class B to Class A shares. Only 732,000 shares, representing a 5% enhance, are from a mixture of recent share choices, equity-based awards, and acquisitions. Dilution is actually one thing to watch transferring ahead, however it’s lower than I anticipated. Additionally, the beforehand talked about share buyback program ought to take away extra shares than the 5% enhance.
Looking Forward
During completely different phases of the financial cycle, client habits could shift away from new boats; nevertheless, we’re well-positioned to profit from income from pre-owned boats, restore and upkeep companies, and elements and equipment, which have all traditionally elevated in periods of financial uncertainty. – 2022 Q1 10-Ok
During the 2022 Q1 Earnings on February 3, 2022, ONEW issued the beforehand talked about EPS steerage of $8.00 to $8.40. At this time, it additionally guided to high-single-digit similar retailer gross sales progress and raised full 12 months adjusted EBITDA steerage to $210 to $220 MM. While financial points had been already beginning, there have been many unlucky modifications since.
Russia invaded Ukraine on February 24, inflation continues to climb, provide chains nonetheless face challenges, and rates of interest are rising. Major firms have additionally issued lower than thrilling earnings and market sentiment has shifted. Since ONEW’s steerage, SPY is down over 7.5%, Vanguard Consumer Discretionary ETF (VCR) is down over 9%, and ONEW itself is down over 35%.
As considerations over rates of interest and recession shift the market, it turns into regarding to put money into inventory that isn’t solely seasonal, however cyclical. Consumers can normally delay discretionary spending. Management has been working to organize the corporate for financial downturns, as it’s not its first time. In its 2021 Q3 10-Q, administration states the next:
Our enterprise was considerably impacted through the recessionary interval that started in 2007. This interval of weak spot in client spending and depressed financial situations had a considerable detrimental impact on our working outcomes. In response to those situations we diminished our stock purchases, closed sure shops and diminished headcount. Additionally, in an effort to counteract the downturn, we elevated our concentrate on pre-owned gross sales, elements and restore companies, and finance and insurance coverage companies. As a consequence, we surpassed our pre-recession gross sales ranges in lower than 24 months.
Today, ONEW is a a lot stronger firm and in a greater place to take corrective actions throughout a recession. It has diversified income into elements and companies, which generally will increase throughout financial downturns. Inventory administration can be improved by sharing stock between places permitting them to function with decrease stock ranges. Additionally, producers are additionally higher ready. During the Q1 2022 earnings name, Austin Singleton mentioned the next:
When we had 2008, 2009, there wasn’t a chance for the producers to grasp how a flatten manufacturing schedule the place there’s not peaks and valleys of their manufacturing schedule makes them far more environment friendly, makes the sellers more healthy, it creates turns, it creates margin. . .
. . . they will create shortage by not producing boats. I simply do not assume they will ramp as much as overproduce and begin flooding the stock area. Because one, I do not assume the sellers need it, I do not assume the ground plan firm needs it. And now I do not assume the producers need it. I do not assume they need these previous peaks and valleys of inefficiency and manufacturing.
A key a part of my funding technique is to get a really feel for the administration group, the choices it makes, and if I can belief it. This group has important expertise within the boating trade, navigated the 2007 recession, and supplied a well-articulated enterprise technique. I consider this group is value trusting with my restricted capital, whilst we probably enter instances of financial uncertainty.
Conclusion
Inflation is excessive, rates of interest are rising, the phrase recession retains passing by the information and market sentiment is shifting. The S&P 500 is down over 13% YTD, the VIX is rising, and the Fear and Greed index sits solidly in “Fear”. It shouldn’t be a very good time for fairness traders, a lot much less cyclical equities like ONEW.
For further ache, leisure shares that boomed through the depths of COVID will face strain because the financial system opens. The boating market, seen as a secure exercise through the pandemic, skilled big progress starting in 2020, however will face competitors as extra actions are seen as secure.
Despite these headwinds, ONEW is a well-run firm with a well-defined technique and a disciplined strategy to M&A. The latest announcement of a giant share buyback program offers me confidence that administration believes the corporate can climate a possible financial downturn, and it believes the shares could also be undervalued.
While I’m not prepared so as to add to my place, I consider ONEW is close to the underside and has been impacted by market sentiment, not its efficiency. It trades at a really engaging fwd. P/E ratio and if I didn’t have already got a place, I’d be seeking to enter. During the subsequent earnings name, I shall be listening for any changes to steerage for FY 2022, in addition to feedback on how clients are responding to rising rates of interest. If administration continues to subject strong steerage and the market continues to punish these shares, I’ll broaden my place.