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Analyst says MasterCraft stock is ‘severely undervalued’

MasterCraft went public last July and a financial analyst says the company is the most attractive of the 13 companies he covers in leisure space.

MasterCraft went public last July and a financial analyst says the company is the most attractive of the 13 companies he covers in leisure space, including Brunswick, Malibu and MarineMax.

MasterCraft is one of the three major players that account for 75 percent of the towboat market, and its shares are “severely undervalued,” says Jimmy Baker, managing director and associate research director at B. Riley and Co.

“The emergence of wake sports has proven to be one of the most important megatrends in powerboats but happened largely unbeknownst to Wall Street, as the beneficiaries were all privately held until 2014,” when Malibu Boats went public, Baker told Trade Only Today.

MasterCraft has been gaining market share in the segment, Baker said, pointing out why he rates it the most attractive prospect in the leisure space he covers.

Because of this designation, MasterCraft was placed on the B, Riley Focus List, which represents the top 12 “ideas” out of 230 companies covered by the B. Riley research team, Baker said.

"All told, we see MasterCraft generating above peer growth, above peer margins and best-in-class return on invested capital,” Baker wrote in his analysis. “We view MasterCraft Holdings, parent company to MasterCraft Boats, as the most compelling idea in our coverage universe.”

Baker sees the company’s new strategy of introducing three new models a year as a “significant driver of sales.”

The X-Series, aimed at the luxury market, has performed well, and the more value-driven NXT series is “thoughtfully expanding MasterCraft’s addressable market without sacrificing margin,” Baker said. The new X-26 is sold out through model-year 2016.

“MasterCraft offers a broad product spectrum. Generally speaking, we don’t see a tremendous amount of white space left unaddressed,” he said.

There is room for several winners in the “attractive performance sport boat segment,” Baker pointed out.

“The category is growing domestically — a trend we expect to continue for several years to come, with room for a Canadian recovery and improved international penetration to drive incremental growth,” he said.

MasterCraft’s debt-free balance sheet, stronger operating leverage, seasoned management team and higher returns on invested capital are listed as reasons the company is most attractive.

The possibility of MasterCraft buying a second- or third-tier company in the performance sportboat category — either a complimentary brand or a “larger dual-brand target” — could propel MasterCraft’s parent company to No. 1 market share, Baker said.

“An entirely distinct, inorganic brand could provide an avenue to more comprehensively address the entry- to mid-level market,” Baker wrote.

At the end of the last selling season, the firm asked dealers what concerned them most about the competitive environment during model-year 2016.

“The results were intriguing since, judging from our conversations with investors, we believe there is somewhat of a myopic focus on competition between Malibu and MasterCraft,” Baker wrote. “Dealers, however, were more than twice as likely to indicate Nautique as their stiffest competition versus Malibu and Axis combined. In fact, surveyed MasterCraft dealers were much more likely to be concerned about competition from other MasterCraft dealers as opposed to Malibu or Axis.”

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