OneWater Marine Inc. ($ONEW) - One Pager
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OneWater Marine Inc. ($ONEW) - One Pager
"Consolidating a Fragmented Market"
This write up was done in collaboration with Inbox Alpha. 99.99999% of the work/research was done by Inbox Alpha, I just put couple of final touches.
If you would like to learn more about Inbox Alpha you can check out their Twitter page & their Website page.
Disclaimer is at the end.
OneWater Marine Inc. (ONEW 0.00%↑) is a pretty simple company. It’s a boat dealer and (more recently) marine parts distributor. The boat industry as a whole is a lot like the automotive industry. There are the manufacturers (Malibu, Yamaha, MasterCraft, Brunswick, etc.) and the dealers – 4,200 across the United states (most of whom have 3 or fewer locations) – who the dealers sell their inventory through. Yes, there are a few larger retail companies – primarily MarineMax and Bass Pro Shops – who sell a pretty large inventory of boats. But for the most part, OneWater operates in the local boat dealership market. A market that it only currently controls 3% of, but which (with limited direct competition) leaves it ample runway to grow.
Up-front, I should say that this situation has gotten a little hairy. And it’s probably one of the risker situations I’ve written about. Since the start of the pandemic, the boating industry has seen some dramatic shifts. Across the industry, the supply chain issues caused inventory to become scarce. At the same time, there was exploding demand. Call it pandemic-related hobbies or whatever, but for some reason demand for boating was increasing faster than it had over the past 10 years. This had the effect of driving up boat prices across the spectrum (and higher revenue), especially so for new boats. But, as the supply-chain issues subsided and demand has weakened on the back of rising rates and a deteriorating economic environment, the industry continued to produce more inventory.
So, as 2023 has progressed, we’ve seen lowered guidance throughout the industry, along with dropping boat prices and volumes. OneWater, as the largest independent dealer, isn’t immune. While its revenue has held up so far, it has seen compressing margins and rising rates on its floor financing as well as its general long-term debt. Because of this OneWater is trading at around 6-7x expected FY 2023 earnings and below 3x FY 2022 earnings. It’s extremely cheap, and the market is pricing it like its part of the rest of the industry – a mature dealer that rises and falls with the vagaries of the boating market.
But OneWater is different. The company was created by a merger of two larger boat dealerships back in 2014. However, the predecessor (who the current CEO still controlled back then) – Singleton Marine – really got its start acquiring the competition back in the turmoil of 2008-09, which jump started the M&A-driven growth that still continues today. OneWater isn’t like the rest of the industry – it’s on a mission to consolidate.
The company has made over 20 acquisitions since 2014, and has grown from 15 locations to 100 as of June 2023. Since 2017 (the earliest year I have financial data from), the company has grown its revenue from $391 million to $1.74 billion in FY 2022 (CAGR of close to 35%), its EBITDA from $20.6 million to $251.5 million (CAGR of just under 65%), its operating income from $19.3 million to $217.8 million (CAGR of 62.3%), and its earnings from -$4.2 million to $152.6 million.
While it deals in expensive inventory and must sometimes endure the cash flow issues associated with such an inventory load, the business is actually pretty capital-light. ROE has recently (the last four years or so) been over 30% and the ROIC has been 20% or over. Margins have also been improving as the business benefits from expanding boat prices (not necessarily sustainable) and higher-margin service and marine products revenue.
Today, its revenue comes from four segments: (1) new boats, (2) used boats, (3) finance and insurance, and (4) services, parts, & other. New boats is still its largest segment, but like a lot of automotive dealerships, the higher margin revenue comes from services and also F&I (which basically goes straight to the bottom line). Aside from actual at-the-dealer servicing income, OneWater has also expanded – more so in recent years – into the marine parts distribution business and hopes to further do so organically (this is still its fastest growing revenue segment at over 50% YOY) and through M&A.
OneWater operates primarily across the Southeastern U.S., with locations located along populous coastlines as well as larger inland lakes. OneWater is a leader in the majority of its markets, and the dynamics of the boat dealership industry allow it to basically create local monopolies for the majority of its dealerships, handling the sales for each brand for a certain area.
Its brand concentration is pretty low (most are 5% or lower, though one is 13% of sales as of FY 2022), but it has some serious purchasing power. It makes up 10-40% of the sales for many of its larger customers and is the number 1 customer for its five largest brands.
OneWater’s strategy, as mentioned above, is to purchase as many dealerships and marine products retailers/distributors as it can. But it does so wisely. It typically tries to make an acquisition at 4x EBITDA, and immediately implements measures to double EBITDA within 24 months.
The biggest risks to the company are both short-term and long-term. Short-term, there’s a possibility that the boating industry deteriorates even further and much faster than anyone anticipated, causing OneWater to have trouble with its debt load, especially in the face of rapidly rising rates. The long-term risk is that, for some reason, OneWater can’t continue to make acquisitions. I don’t think same-store sales growth will be able to repeat what it has done since OneWater’s IPO in 2019 – making up anywhere from 28%-40% of growth every year (though this kind of misstates things, as a lot of the “organic” growth is a result of OneWater’s revenue-boosting activities at the dealerships it acquires). So, if OneWater can’t continue to make cheap acquisitions, the investment thesis is busted. I think, as it stands though, this probably won’t happen. OneWater is largely free of competition for the dealerships it wants to acquire (i.e., no one is bidding up the price), which is actually one of my favorite things about the company and its future.
Overall, if OneWater can withstand the short-term volatility in the boating industry, it’s on pace to significantly outperform. The market isn’t taking into account OneWater’s long-term potential, even if the marine industry as a whole does poorly or even contracts over time. The potential (and lack of real obstacles) for OneWater to further consolidate the industry while paying very cheap prices to do so offers a very compelling opportunity.
If you enjoyed this, Inbox Alpha has a much deep dive into OneWater Marine on his website, click here to check it out (its 31 pages long!)
Holdings Disclosure
At the time of this publication, Inbox Alpha does not owns shares in OneWater Marine Inc. ONEW 0.00%↑ but they are considering while I (YZ) don't.
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Disclaimer
The information in this article is provided for informational and educational purposes only.
The information is not intended to be and does not constitute financial advice or any other advice, is general in nature, and is not specific to you. Before using this article’s information to make an investment decision, you should seek the advice of a qualified and registered securities professional and undertake your own due diligence.
None of the information in this article is intended as investment advice, as an offer or solicitation of an offer to buy or sell, or as a recommendation, endorsement, or sponsorship of any security, company, or fund. The author is not responsible for any investment decision made by you. You are responsible for your own investment research and investment decisions.
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OneWater Marine Inc. ($ONEW) - One Pager
Great post - know v. little about this sector and this has piqued my interest!
Curious why you don’t think there’s much competition. marinemax is a large competitor.