Malibu Ratchets Back Production in Response to Dealer and Buyer Caution to Protect Brand

Senior Equity Analyst

Jaime M Katz

Malibu is a long-established name in performance sport boats, venturing into the sterndrive and saltwater segments via acquisitions in recent years. We believe that its brand, innovative products, and consistent pricing power contribute to a brand intangible asset, which underpins our narrow moat rating. Supporting its market leadership, it’s demonstrated an ability to meet evolving customer preferences, bringing new products to market quickly, with new models and numerous new features rolled out annually across all of its segments. And it has capitalized on its brand strength by expanding into adjacent categories, such as trailers and accessories, which we expect to continue. However, Malibu hasn’t rested only on innovation to grow profits, also curating savings through streamlined production and rising efficiencies through vertical integration. As evidence, efforts at Pursuit’s new plant had increased the EBT margin at the brand to 13% in 2023 (from 9% in 2020), even with the acquisition of Maverick. With continuous improvements to the manufacturing process, Malibu should be able to limit expense growth over time.

Additionally, we expect Malibu to grow via strategic acquisitions. The addition of Cobalt, Pursuit, and Maverick within the last six years has provided robust sales growth for the firm (averaging 33%), thanks to a strategy based on fit and the ability to raise shareholder value. As a result, our model expects tie-ups every other year in the $140 million price range, providing a volume bump of around 300 incremental units on average. While such transactions should drive sales growth, we remain confident in Malibu’s ability to also maintain interest in its legacy brands.

Our model expects Malibu’s sales to grow 7% on average between 2025-33, including acquisitions. While demand for outdoor recreational products had been elevated with social distancing measures due to the pandemic, we expect more rational sales growth long term stemming from market share gains and expansion into whitespace categories. As a result of its success, Malibu should generate adjusted returns on invested capital, including goodwill, that average 19% over the next decade.

Business Strategy & Outlook

We rate Malibu Boats with a narrow moat due to its brand intangible asset, as evidenced by the company’s robust market share in its legacy markets (29% in performance sport boats and 36% in 24- to 29-foot sterndrive in calendar 2022). To quantify its leadership spread, we estimate the closest competitors in its sterndrive niche, Sea Ray and Chaparral, hold market shares below 20%, while other competitors fall into the single-digit range. This market position (reached via solid brand equity) has offered Malibu strong adjusted returns on invested capital, including goodwill, that have averaged 27% during the past five fiscal years, far outpacing our 10% weighted average cost of capital estimate. We expect these healthy returns to continue and forecast a 10-year average adjusted ROIC, including goodwill, of 19%. However, we have bound the breadth of our moat at narrow because of the fragmented nature of the boating industry and the potential for boating preferences to change over time (for example, to prefer pontoons over sport boats) tempering our confidence that Malibu can outearn its cost of capital for two decades.

Malibu Boats started in 1982 focused on waterski tow boats but has since expanded beyond its reputation as a leading manufacturer of watersport power boats. With the introduction of the more affordable Axis brand (relative to the namesake Malibu brand) and the subsequent Pursuit, Cobalt, and Maverick acquisitions, it has expanded its reach into its total addressable market (which has grown to more than $16 billion in calendar 2022 from less than $6 billion in 2015) and brand exposure and is now the market leader in two of the boat categories it serves: performance sport boats and sterndrive and outboard. In the performance sport segment, which includes the Malibu and Axis brands, its share grew to 29% in calendar 2022 (most recent data point available) from 24.5% in 2010. The sterndrive 24- to 29-foot segment (which includes the Cobalt brand) market share has similarly increased from 14% to 36% in between 2010 and 2022. Pursuit’s growth has been more gradual, representing 18% of the offshore segment in 2010, growing to more than 19% in 2019 (2022 share is not disclosed, but we surmise it was over 20% with the Maverick acquisition), and we expect Malibu to capitalize on growth for larger vessels ahead with its new plant (operational since 2020) and production strategy.

We contend that market share gains are bolstered by the innovation and breadth of selection incorporated in Malibu’s models, supporting the firm’s brand intangible asset moat source. In the performance sport boat segment, Malibu has historically offered around 15 different tow boat models. Additionally, Malibu regularly releases new models with more advanced features to encourage upgrades (as evidenced by 50% of Malibu owners having owned four or more boats in their lifetime). With new models, it has historically released numerous new features annually, at a pace we anticipate will continue, given the elevated level of general and administrative spending forecast ahead (averaging 6% of sales, and including research, development, and engineering). 

Malibu holds patents on numerous proprietary innovations, including the Surf Gate and Power Wedge technologies, both of which are key to its success with wake-sport enthusiasts (as evidenced by the growth in market share). The modular construction of the boats allows the company to increase offerings without adding substantial cost to production, while the patents on the high-tech, high-margin innovations prevent imitation (and the firm has fervently protected its intellectual property in the past). Surf Gate, which allows wake surfers to customize the shape of the boat’s wake, has become so popular that even competitors such as Marine Product’s Chaparral line license the technology for use in its boats. We don’t fear this relationship will affect Malibu’s sales, though, as Chaparral’s boats are larger and designed more for pleasure cruising than for water sports, and so the two do not directly compete (admittedly, Chaparral may compete with some of Cobalt’s offerings). Wake surfing interest has been on the rise in recent years, since it’s easier to learn and is lower-impact than more traditional water sports. The first wakeboarding championship was held in 2013, and it has grown since, with multicountry competitions and tours. Such sport visibility should enhance Malibu’s brand awareness, helped by the firm’s sponsorship of several professional wakeboarders. 

Additionally, such consistent innovation has offered Malibu the ability to lift transaction values over time, further indicating product resonance with consumers. Overall, net sales per unit in the Malibu segment have increased 90% since 2017, driven primarily by customer acquisition of more expensive models and by add-on features such as Surf Gate. In the Malibu/Axis brand segment, net sales per unit increased 6% to $124 in fiscal 2023, 

on top of 2022's 18% increase in net sales per unit. Even with the more budget-friendly Axis model, which has grown faster than Malibu over the same time, the ability to increase price per unit reinforces our thesis that customers are willing to pay up for Malibu’s brand and innovation. And we expect pricing to at least match cost increases ahead; over the next decade, we see both gross profit (our proxy for pricing) and operating expenses rising at mid-single-digit clip per year in fiscal 2025 and beyond.

Continued innovation will be key to Malibu’s ability to increase pricing power; recent product offerings have supported higher prices in 2023, and we project overall net sales per unit up 9% in fiscal 2024, assuming a mid-single-digit rise in the back half of the year. We expect spending on general and administrative costs, which houses research and development spending, to remain around 6% of sales over our explicit forecast compared with 6% on average over the last three years (excluding the 2023 litigation settlement), financing such innovation. Furthermore, we don’t foresee Malibu slowing its marketing and selling spending, keeping it in favor with its dealer base. We forecast Malibu to spend between 2%-3% of sales on marketing and selling longer term, in line with corporate spending over the last five years to maintain demand momentum.

Remaining in favor with the dealer base is imperative, and we think Malibu could not have captured brand equity over time without the relationships of its 400 dealers (300 of which are in North America). This is comparable with Mastercraft, which has about 300 dealers across its brands, but fewer than wide-moat Polaris--which caters to the pontoon market--with more than 550 boat dealers. Of those dealer relationships, around 50% have lasted over 10 years. In the past, Malibu has indicated that more than 90% of dealers exclusively represent Malibu tow boats, indicating the dealer loyalty and enthusiasm to the brand. Additionally, Cobalt had also benefited from its network, with more than 150 dealers that hold the first or second market share position in 65% of their respective U.S. markets at the time of acquisition. When purchased, Pursuit added over 50 dealers, a result of the smaller market it serves, and also sees healthy brand loyalty, with relationships averaging about 12 years. The number of dealers catering to saltwater brands should increase in response to Malibu's ability to generate higher throughput. Additionally, the most recently acquired Maverick Boat Group brought exposure to more than 70 dealers to the corporate mix, potentially helping expand brand reach.

As a result, we believe Malibu’s distribution network would be difficult for a new entrant or competitor to replicate. The dealer network, particularly for the main Malibu brand, has taken decades to cultivate and would be difficult for a competitor to build. Moreover, the wide price range of Malibu’s products, beginning at $60,000 and extending up to more than $1,000,000 for the high-end saltwater models, alleviates our fears that a competitor could undercut Malibu with lower-priced offerings (of a similar quality) during an economic downturn. 

Additionally, Malibu has solidified its presence in the industry by focusing on vertical integration in recent years, moving production of its towers (overhead frames mounted to the hull) in-house and developing its own lines of engines, trailers, and trailer accessories. As evidence of the relevance of such efforts, 95 out of every 100 Malibu customers who purchased a new boat also ordered a trailer (most recent data available). Most recently, it developed the Malibu Monsoon engine in 2019, which was incorporated in all new 2020 Malibu and Axis models and are also being added to Cobalt models. By moving away from third-party suppliers, the firm is better able to control the costs and production risks associated with the engines. Additionally, it gives Malibu the opportunity to expand its margin per boat sold. Overall, Malibu’s EBITDA margins was expected to expand (to the tune of 100 basis points) as a result of the Monsoon engine integration, signaling the favorability of the effort, while others, like narrow-moat BRP, have shuttered boat engine manufacturing because of weak returns. In fiscal 2023, Malibu’s adjusted EBITDA margin was 20.5%, comparable with Mastercraft’s 19.9%, so further EBITDA expansion (once demand normalizes) could indicate integrated engines have helped give Malibu an edge over peers (we forecast around a 10% adjusted EBITDA margin in fiscal 2024 hindered by lower wholesale shipments). We contend that these above factors, supported by Malibu’s existing boat manufacturing locations and supplemental trailer and parts production locations, now with additional facilities from the Maverick acquisition, give Malibu an advantage over new competitors that would struggle to achieve that efficiency and infrastructure quickly. Additionally, to maintain its competitive edge, the firm recently opened its tooling design center, a facility that accelerates Malibu’s journey to build most of its tooling across brands over time, which helps in both quality control and the avoidance of supply chain issues, allowing for faster turns at retail and wholesale that better matches retail. Also, it acquired a property in Tennessee to facilitate further unit growth, signaling a potential launch into pontoons or another adjacent category soon.

For reference, the total boat market has been growing steadily, although it has still not returned to pre-2008 levels. In units, the performance sport boat segment grew 56% from 2015 through 2022, and the outboard segment grew 3% in the same period. Going forward, we expect the firm, already the market leader, to grow at a mid-single-digit clip thanks to continuous product innovation and acquisitions in fiscal 2025 and beyond. Additionally, while the categories Malibu operates within could continue to grow, we expect the Malibu brands to still outpace the market, as consumer demand continues to trend toward larger and more luxurious amenities on vessels, which is in Malibu's wheelhouse. The saltwater lineup has significant room to take share in its growing segment, with the industry potentially returning to growth after a downtick in fiscal 2024. Factors including employment gains and higher discretionary income should also generally support boat industry growth in periods of controlled inflation.

Narrow

Economic Moat

Malibu Boats

Malibu Boats, Inc. is a holding company, which engages in the design, manufacture, and marketing of recreational powerboats. It offers performance sport boats, sterndrive, and outboard boats under the Malibu, Axis, Pursuit, Maverick, Cobia, Pathfinder, Hewes and Cobalt brands. The firm operates through the following segments: Malibu, Saltwater Fishing and Cobalt. The Malibu segment is involved in the manufacturing, distribution, marketing and sale of Malibu and Axis performance sports boats throughout the world. The Saltwater Fishing segment includes manufacturing, distribution, marketing and sale throughout the world of Pursuit boats and the Maverick Boat Group boats. The Cobalt segment participates in the manufacturing, distribution, marketing and sale of Cobalt boats throughout the world. The company was founded in 1982 and is headquartered in Loudon, TN.

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Malibu Boats, Inc. is a holding company, which engages in the design, manufacture, and marketing of recreational powerboats. It offers performance sport boats, sterndrive, and outboard boats under the Malibu, Axis, Pursuit, Maverick, Cobia, Pathfinder, Hewes and Cobalt brands. The firm operates through the following segments: Malibu, Saltwater Fishing, and Cobalt. The Malibu segment is involved in the manufacturing, distribution, marketing and sale of Malibu and Axis performance sports boats. The Saltwater Fishing segment includes manufacturing, distribution, marketing and sale of Pursuit boats and the Maverick Boat Group boats. The Cobalt segment participates in the manufacturing, distribution, marketing and sale of Cobalt boats. The company was founded in 1982 and is headquartered in Loudon, TN.

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