Interest Rate Cuts and Malibu Boats $MBUU

Starting to try and incorporate technicals

As I was reflecting on which sector is likely to be the biggest beneficiary of the probable interest rate cuts, I became increasingly aware that I have no clue in which order the dominos will fall.  I have been preparing my portfolio for this day with exposure to REITS, homebuilders, realtors, retirement solutions, durable goods, autoparts, etc.  Some of which have been rallying for months already, some of which are still falling knives.  If I knew which sectors would benefit first, I could happily rotate my way to fabulous returns, but such knowledge is beyond my grasp.

There is an interest rate sensitive company that has been on my watchlist for a very long time, and while my gut tells me that I am probably early, the chart tells me that Malibu Boats (MBUU) might be at an inflection point.  And, as always, the insider buying tells me that this is probably a well run company.  The screen that I ran that brought this company to the top of the list was the size of the insider purchase as a percentage of the market capitalization of the company.  There are a lot of tech founders in silicon valley who spend millions on insider purchases of large cap stocks, but outside of the tech ecosystem, a half a million dollars is a serious vote of confidence from two directors.

Malibu Boats is a vertically integrated manufacturer and aggressive brand rollup of waterskiing and wakeboarding boats with a growing 30% market share in that category.   They own the brands Malibu, Cobalt, Axis, Pursuit, Cobia, Pathfinder, Maverick, and Hewes, and they are still on the hunt to buy more, especially to expand to different categories within boating.  And do my eyes deceive me, or have they been making higher lows since the bottom in July?

Malibu has a new CEO, Steve Menneto, and I am cautiously optimistic that he is a good hire.  While at Polaris (PII), Menneto oversaw the Indian Motorcycle division and grew revenues from $3 million annually to $500 million over more than a decade.  Afterward he oversaw the entire offroad division and doubled revenue in the course of 4 years.  On the last conference call he did acknowledge that the boat market does have its unique differences over his prior off road experience, larger ticket size, slower turnover, etc., but all in all the new CEO didn’t throw off any red flags.

Even with the current slow market, MBUU’s variable cost structure allowed them to be operationally cash flow positive for their 2024 fiscal year, and they have bought back $30 million of shares in the last year after retiring all of their long term debt in 2023.  There are two temporary effects on the 2024 fiscal year, a large lawsuit settlement and inventory destocking. Both are clouding 2024 fiscal earnings, and if you look through those effects, MBUU would have had profits in the range of $2.00 a share at a time that must almost certainly be their worst environment with higher interest rates and the Covid durable goods spending pull forward.

Guidance for 2025 is about a 10%-12% improvement over 2024, and management believes they will be at about $1 billion in revenue. Peak revenue was the 2023 fiscal year with $1.38 billion.  MBUU expects headwinds to continue for a while longer, but that they are in a multi-year trend of taking market share, and they expect to continue taking market share from their competitors.  They tend to be $20,000 to $30,000 cheaper than competitors for a comparable boat due to their vertically integrated manufacturing.  Management claims that they delight customers with their technological innovations, but in this area I am out of my element to judge.

Looking forward, the CEO discussed capital allocation priorities, and that order of priorities was: high internal rate of return efficiency manufacturing investments, acquisitions, retiring debt, and finally share buybacks.  With the debt already retired for the moment, I have a suspicion that the recent share buybacks were only because they didn’t have an acquisition to close in the most recent period, but management has their eyes on at least two potential acquisition targets, one breaking them into the pontoon boat market.  

I am fond of rollups, and MBUU has a history of increasing market share of their acquired brands, but I am worried about paying too high a price compared to buybacks at the current depressed valuation.  I suppose it depends if you want to buy MBUU for a quick reversion to the mean, or if you want to buy and hold them for the long run.  They are just a tad bit small at a $700 million market cap to see the near term benefit of increased size for ETF inclusion and increased multiples, unless you really want to own this company for a very long time.  Polaris (PII), is by many metrics about twice as expensive as Malibu Boats, but will Malibu need to 5x revenue in order to achieve multiple expansion?  At their current growth rate, looking past the Covid pull forward, MBUU is doubling revenues about every 4 years.  A 2x multiple expansion on top of a 5x in revenue over the course of ten years is a 25% compound rate of return.

Malibu Boats generated over $100 million in free cash flow in 2021, $110 million in 2022, and $130 million in 2023.  On a return to normal volumes, at a $700 million market capitalization, you would be buying Malibu Boats at a little over 5x normalized free cash flow.  Thinking more medium term, a return to their past price to sales ratio of 2x, and a return to $1.38 billion in revenue, would imply $134 per share compared to their current price of $35.38, about a 3.5x return, potentially within 3 to 4 years.  If that took 4 years, it would be a 39% compound rate of return.

On a shorter time horizon, fiscal 2025 revenues of $1 billion with a 10%-12% EBITDA margin would put 2025 EBITDA between $100 million and $120 million.  That projection does not include an increase in sales due to lowered interest rates, it only takes into account gain in market share, an end to destocking, and low single-digit price increases.  A forward price to earnings ratio of around 7x is pretty cheap for a growing luxury brand, but the real multibagger potential will come from a return to a booming economy, however long that takes to materialize.

My own prediction for interest rates is that even though we might have a few 0.25% rate cuts, sticky inflation and a relatively stable labor market will make it hard for the federal reserve to cut anywhere near as much as the market is currently anticipating.  If I am wrong about that, and interest rates are cut to such an extent that HELOCs and cash-out mortgage refinancing become popular, then Malibu Boats would be a natural beneficiary of Americans tapping into their newfound $13 trillion in home equity.  

If you are interested in a more thorough analysis, please feel free to check out

Liger Cub

’s writeup on Malibu Boats from this past April.  I can’t throw stones at anyone for being early from my glass house, but I am doing my best to incorporate technicals after catching a few too many knives.

For paid subscribers, below is a quick rundown on what I am buying this week with new dollars from rolling put contracts.