Will a Rising Tide Lift or Sink These Boating Stocks?

Leo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

On Wall Street, it’s common to claim that “a rising tide lifts all boats.” Improved job numbers, a recovering housing market, and rising consumer confidence have pulled up most stocks across the market. In a previous article, I discussed how RV sales were boosted by the rising appetite for big ticket purchases in the U.S. In this article, I’ll examine another business of big ticket vehicles -- boats.

Sailing smoothly through turbulent tides

According to boats.com, May was the boating industry’s best month since 2009, reporting over 3,700 boats sold. Sailboat and powerboat sales increased 5% and 4%, respectively, from the previous year. Powerboats made up 80% of the U.S. boat market during the month.

The National Marine Manufacturers Association reported that industry sales rose 10% year-on-year in 2012 to $36.5 billion, and were on track to log 5% growth in 2013. Although that would indicate a slowdown from the prior year, it is still a positive sign for the industry, which was nearly wiped out by the 2008 financial meltdown.

Let’s check in on a few major publicly traded boat companies, which focus on different segments of the industry, to see if the boating industry will present viable investments in 2013 and 2014.

Bowling, billiards...and boats?

Brunswick (NYSE: BC), based in Lake Forest, Illinois, is the 800-pound gorilla of the industry with a market cap of over $3 billion. The company has a diversified portfolio of products, including marine engines, boats, fitness equipment, bowling, and billiards equipment.

Last quarter, Brunswick’s revenue rose 4% to $995.3 million, but diluted earnings per share dropped 46% to $0.59, or $54.9 million, due to $0.12 of special tax items and $0.05 of restructuring, exit, and impairment charges. Otherwise, net earnings from continuing operations actually rose from $0.51 to $0.59 per share. Despite producing fitness, bowling, and billiards equipment, the majority of Brunswick’s top line comes from its Marine Engine and Boat segments.

Sales at its Marine Engines business rose 7% to $521.8 million, accounting for 52.4% of Brunswick’s total sales. Operating profit at the business also rose 49.2% to $71.5 million. Sales of its outboard, parts, and accessories were notably higher than sales of its sterndrive engine products.

Brunswick’s Boat Segment, however, reported a 1% year-on-year sales decline to $289.7 million, which accounts for 29.1% of its top line. The company blamed this slide on a 13% decline in international sales, which make up over a third of total segment sales. Operating profit also slid from $10.5 million to $2.4 million.

Diversification is a double-edged sword

Looking at Brunswick’s quarterly results, it’s painfully clear that its overseas exposure and a diversified portfolio have worked against it. Brunswick’s consolidated sales in the United States rose 7%, but were dragged down by a 4% decline in Europe and flat performance in the Rest of the World.

Considering how large and diversified Brunswick is, we should also focus on a trio of smaller companies instead -- West Marine (NASDAQ: WMAR), Marine Products (NYSE: MPX), and MarineMax (NYSE: HZO) -- which concentrate on specific segments of the boating industry.

Boating supplies and apparel

West Marine doesn’t sell any boats. Rather, it sells recreational and commercial boating supplies and apparel. Although it would seem like a safe bet that rising boat sales would equal higher sales of accessories, it certainly didn’t look that way last quarter. The company reported a loss of $0.38 per share, which had widened from a loss of $0.27 per share in the prior year quarter.

Revenue slid 5.9% to $114.2 million as same-store sales slumped 6.6%. West Marine predictably blamed a colder spring, as many apparel and sporting goods retailers did last quarter. However, selling clothes and supplies for boating activities is still very different from the real business of selling boats. However, the next two quarters, which will include the summer, could help West Marine bounce back slightly as the outdoor season kicks into high gear. Nonetheless, the company only anticipates flat to 2% same-store sales growth for the full year.

Focusing on the core market

Considering that boat sales are the strongest in the U.S., and the majority of sold boats are smaller powerboats, then it stands to reason that a company like Marine Products, which specifically focuses on that market, should be reporting healthier growth than either Brunswick or West Marine. Marine Products designs, manufactures, and distributes premium boats, which include Chaparral sterndrive pleasure boats, Premiere sport yachts, and Robalo sports fishing boats.

Last quarter, Marine Products’ revenue rose 17% year-on-year, but its earnings declined 11.2%. However, the company actually sold 12% more boats during the quarter as its average selling price rose 2.9% from the previous year. The company’s earnings decline was mainly caused by a steep 14.1% rise in SG&A (sales, general, and administrative) expenses.

Although Marine Products is an American company, it still generates 22% of its sales overseas. International sales remained flat, with weak sales in Europe offsetting strong numbers in Australia.

The boat dealers

Last but not the least, we should focus on the boat dealers like MarineMax. MarineMax sells and services new and used boats across the United States. The company sells boats that range from $13,000 to $2.5 million, but it has noted that rising interest rates have throttled purchases of its highest-priced marine vessels. The company also noted that although boat sales spiked 30% after Hurricane Katrina, sales haven’t risen as quickly as expected after Hurricane Sandy.

Last quarter, MarineMax’s revenue rose 11.1%, but its earnings plunged 85%. The company hasn’t been profitable since 2008, although it has slowly clawed its way back towards profitability over the past five years.

The Foolish bottom line

In closing, I believe that investors looking into the boating industry should consider investing in Brunswick and Marine Products. Brunswick has a well-diversified portfolio that holds it back in times of plenty, but can insulate it when times get tough. Marine Products, on the other hand, has a sharp focus on smaller domestic watercraft, which means its business will continue growing steadily as discretionary spending in the U.S. improves.

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Meanwhile, West Marine looks like a safer play to piggyback on rising boat sales, but in reality, it is highly exposed to the same macro challenges that have been weighing on the retail apparel and sporting goods sectors. Lastly, dealers like MarineMax may benefit from seasonal, regional sales of boats, but they can be hit by unstable weather conditions and rising interest rates.

Therefore, to answer my original question, the rising market tide won’t sink these boating stocks, but I don’t think investors should expect the robust returns that they’ve enjoyed over the past year to continue, since higher interest rates and decreased boat sales in 2013 could mean that the upside for these stocks is fairly limited.

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