Value Line Institutional Services

 

June 2017

 

Near-Term Investment

Malibu Boats (MBUU)

By Jeremy Butler, Editorial Analyst

Malibu Boats (MBUU) is a leading designer, manufacturer, and marketer of performance sport boats. The company has two brands of sport boat: Malibu and Axis Wake. The boats are used for water skiing, wake boarding, wake surfing, and racing. The Axis brand is designed to appeal to consumers who desire a more affordable product, with the option to upgrade key features, such as engine power. The Malibu brand is geared toward a higher-end consumer, one that is attracted to greater speed, convenience, and comfort. As of March 31st, MBUU had 112 independent dealers in North America. Outside the United States, Malibu has 59 dealers across 38 countries. In February, the company added the prestigious JSW Powersports franchise, based in Queensland, Australia, to its family of dealerships. Malibu Boats was founded in 1982; is headquartered in Loudon, Tennessee; has three manufacturing plants (in Tennessee, California, and Australia); and employs about 540 workers.

Investment Thesis
An ongoing low interest-rate environment (despite modest tightening to date by the Federal Reserve, borrowing costs remain low by historical standards), increasing consumer confidence, and subdued fuel costs are propelling a surge in recreational powerboat buying. Furthermore, a large percentage of existing powerboats is coming to the end of their useful lives (generally about 15 years). As such, new boat sales, especially to baby boomers and retirees in Sunbelt states, are rising. In 2016, more rainfall in MBUU’s lucrative California market increased unit sales 25% in that region. This was because the rain filled natural and man-made lakes and reservoirs that had been previously empty due to a long period of drought. In addition, after having been relatively frugal for multiple years after the last recession, many consumers are now ready to spend on a luxury item, like a boat.  Moreover, many of Malibu’s customers are small business owners, and the potential for greater deregulation and perhaps lower taxes (priorities of the Trump Administration) is encouraging them to think about buying a boat. Malibu’s order backlog continues to rise, and cancellations are flattening out. This portends higher sales and earnings in 2017 and beyond. At the height of the performance boat market, prior to the 2007-2009 recession, total U.S. boat sales tallied 13,400. At the end of 2015, they totaled 7,800. (A “performance” or “sport” boat is one that is solely designed to pull someone on water skis or a wakeboard for recreational and/or competition purposes.) There appears to be a great deal of recovery potential. MBUU’s name recognition, marketing expertise, and top market-share position (33% in the United States, according to management) reflects the popularity of its crafts.

Although the stock price has risen smartly over the last 12 months, the growth has been from a low base ($11.40 a share in June, 2016). With sales and earnings expected to continue rising this year and next, it’s not too late to jump aboard this fast-moving vessel, in our view.

Why Buy a Malibu Boat?
One of the things that has made Malibu Boats the boat of choice for many is the company’s consistent ability to innovate. For example, it was the first performance boat company to install onboard computers in 2004. This led to the company’s patented “power wedge”, which gives the boat pilot the ability to change the wake emanating from the back of the boat at the push of a button. This feature keeps wakeboarders and water-skiers being pulled behind the boat endlessly entertained. (A wakeboarder is someone who is pulled behind the boat on one board, similar to a surfboard.) The company sells a wide variety of boats, all of which can be customized. The boats are sold at a range of price points in order to attract a wider consumer base. Axis models sell from $45,000-$95,000, and Malibu models range from $40,000-$175,000. These prices are competitive with rival boat makers’ offerings. Lastly, follow-up service over the years has been stellar, leading to great customer loyalty.

Finances
In the fiscal third quarter of 2017 (ended March 31st), Malibu sold 1,054 boats at an average price of $73,196, totaling sales of $77.149 million. This compared to 955 boats sold for an average price of $71,769 a year earlier. Fiscal third-quarter share earnings rose 41%, to $0.45. We look for full-year fiscal 2017 share net of $1.55, up 55%, from 2016’s total of $1.00. Meantime, fiscal 2017 sales should be up 8.7% to $275 million, likely going to $295 million in fiscal 2018. The company’s most profitable quarter is its June (fourth) quarter. This is when most boats are bought.

Long-term debt as a percentage of total capital had been reduced to 57% at the end of March, compared with 76% on June 30, 2016. Meanwhile, over the same time period, cash assets have risen 25%, to $32.3 million. Long-term debt peaked in fiscal 2015, when Malibu required capital to expand its facilities to ramp-up production because of increased demand.

Conclusion
Malibu’s earnings have surpassed Wall Street’s consensus expectations in four of the last five quarters. This is one of the reasons the stock recently traded near its 52-week high, on growing institutional trading volume. The strong U.S. dollar means that overseas sales will likely be flat this year, but domestic sales should rise. More dealerships ought to enable Malibu to strengthen its already impressive global market share. And by sponsoring top wakeboarding and waterskiing stars like Regina Jaquess, Amber Wing, and Parker Siegele, Malibu has significantly raised its profile with recreational boat enthusiasts. This demographic consists of relatively wealthy middle-class people with children or grandchildren who live close to large bodies of water. This population can afford to deposit a sum as low as 5% of the price of a Malibu boat in order to buy it outright. The remaining 95% is paid off over a 15- 30-year period at a relatively low fixed interest rate. Given the aforementioned favorable demographic and macroeconomic trends, along with the company’s innovative design, demand for Malibu’s boats should continue to grow, leading to greater sales and earnings.

 

At the time of the above article’s writing, the author did not have positions in any of the companies mentioned.

 

Long-Term Investment

Ameresco, Inc. (AMRC)

By Kevin Downing, Editorial Analyst

Ameresco, Inc. (AMRC) primarily engages in the development, design, engineering, and installation of projects that reduce the energy, operations, and maintenance (O&M) costs of customers’ facilities. Each project is customized and designed to improve the efficiency of major building systems, such as heating, ventilation, cooling, and lighting systems. Specific measures include wastewater recycling, light-emitting diode (LED) lighting, smart metering, and battery storage, among others. Ameresco also offers the ability to incorporate analytical tools that improve building energy management capabilities and identify opportunities for cost savings. After a project is complete, Ameresco may operate, maintain, and repair the customer’s energy systems under a multi-year O&M contract, which provides recurring revenue and improved earnings visibility.  Finally, the company builds small-scale renewable energy plants located at or close to a customer’s site. Most plants are solar, but some use landfill gas, wastewater, or biomass as primary energy sources. Energy generated by these plants is typically sold to customersunder long-term supply contracts.

Historically, approximately 75% of revenues have been derived from federal, state, or local government entities, including public housing authorities and public universities. Federal customers include various divisions of the U.S. Government and constituted 27.3% of consolidated revenues in 2016. That year, AMRC’s largest 20 customers accounted for approximately 43.6% of total revenues.

For most federal and large-scale government energy efficiency projects, Amaresco enters into energy savings performance contracts (ESPCs). Here, a private-sector enterprise will invest the upfront capital for AMRC’s energy infrastructure upgrades. Some or all of the operational cost savings created by the efficiencies gets returned to the financier over time as payment for the initial outlay. The federal facility gets more efficient equipment without having to increase their budget. Institutional customers such as state and local governments, schools, and public housing authorities, typically finance their projects through tax-exempt leases or issuances of municipal bonds. The company assists clientsin obtaining and structuring the aforementioned types of third-party financing.

New Projects

Ameresco has been selected to lead a team of vendors responsible for modernizing Chicago’s streetlight system. The project involves replacing 85% of the city’s streetlights with 270,000 LED light fixtures capable of lowering electricity costs by 50%-75%. In addition to the new lights, AMRC will be installing an intelligent management and control system that can identify individual outages and remotely control lighting levels. The technology can also serve as a platform for future smart city applications other than a smart lighting grid. The project should be completed in four years and cost up to $160 million. Installations are expected to begin this summer.

Since the Chicago project is rather large and prominent, it may well drive increased business from other communities nationwide. Ameresco believes its lighting management and control technology will act as a differentiator and lead to more business wins. The potential market opportunity appears to be growing quickly. According to the company’s statistics, only 1.7 million LED streetlights had been installed by 2014. By 2022, around 30 million lights are expected to be converted per year.

Elsewhere, on April 6th, the New York City Housing Authority announced that Ameresco was selected to execute the first phase of an energy performance contract covering sixteen public housing developments in Manhattan, Brooklyn, and the Bronx. The $56 million project includes lighting, low-flow water fixtures, and heating upgrades targeting nearly 20,000 apartments. The second phase will reportedly cost $100 million.

Many public housing authorities are facing aging infrastructure and budget cuts. President Trump’s proposal for the 2018 federal budget includes a $6.2 billion cut to the U.S. Department of Housing and Urban Development. Considering the current environment, the demand for these kind of cost-saving upgrades should remain strong for the foreseeable future.

Further, in early May, the company announced that the U.S. Department of Energy had awarded Ameresco an Indefinite Delivery Indefinite Quantity contract, for Energy Savings Performance Contracts. Essentially this extends prior expired program authorizations so new work can commence. AMRC was one of 21 companies awarded the five-year, $55 billion follow-on contract. According to U.S. Secretary of Energy Rick Perry, “these energy and water efficiency projects at federal facilities pay for themselves, and the hope is that all federal agencies will utilize this financing method to the fullest extent.” This statement demonstrates that the federal government recognizes the positive impacts ESPCs can have on facilities without expanding budgets, which should help drive long-term federal demand. Further, the company has not yet seen any material change in order flow following the entrance of the Trump administration. Although a change in direction from the Federal government may come, we view this as less likely since the matter appears largely nonpartisan.

Elsewhere, the company continues to build out its portfolio of energy producing assets. It now has landfill gas, biogas, and solar assets producing the equivalent of 172 megawatts. Facilities capable of producing an additional 95 megawatt equivalents are under development, and half of that is currently under construction. All of this should increase recurring revenues.


Recent Results and Guidance

The company reported flat first-quarter revenue, which was better than expected for the seasonally weak period. Project revenue was up slightly owing to timing. Elsewhere, O&M revenue was down since a contract amendment during last year’s March quarter created a difficult comparison. Excluding this, O&M revenue was flat, and the company still expects the division to see top-line growth this year. Net Income and adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) were down slightly due to the O&M amendment impact and increased operating expenses related to investments in the business.

One of the highlights from the release was that backlog (this includes awarded projects, which are in development but for which the company has not yet signed customer contracts) grew 18% year over year and reached an all-time high of $1.6 billion. Too, the contracted backlog (expected future revenues under signed customer contracts) increased 40%, which improves visibility. The gains were driven by the Chicago project, wins from existing customers, and new accounts. The company reiterated its full-year 2017 revenue guidance of 2%-8% growth. Adjusted earnings per share are expected to be up 42% to 65%.

Conclusion
Before the U.S. Presidential election last November, AMRC shares had been in the doldrums for several years. The shares got a boost from the election, but gave most of that back in the following months. However, solid results in the last two quarters have helped the shares outpace the Russell 2000 Index by 30%. The federal government is seemingly in support of the implementation of new energy infrastructure across the country, largely because public financing makes the projects budget neutral, negating the need for upfront investment from the U.S. Treasury. Demand from state and local municipalities is also expected to stay strong. Thus, we are confident public sector design wins will continue rolling in. In general, projects have been getting larger and more sophisticated of late witha broader set of technologies being offered. Meanwhile, more business from repeat customers, combined with a buildout of renewable energy plants, should diversify revenue streams, resulting in higher recurring revenue, increased visibility, and less earnings volatility, as the timing of large uneven contracts has less impact on quarter-to-quarter results. Investors with some appetite for risk should consider this small cap equity, in our view.


 

At the time of the above article’s writing, the author did not have positions in any of the companies mentioned.

 

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