OneWater Marine (NDX: ONEW)
An up-and-coming small cap serial acquirer in the marine industry
Summary
OneWater Marine is a portfolio of boat dealerships operating across the United States and exhibits similar characteristics to that of a serial acquirer. Like Boyd Automotive or Kelly Partners, OneWater seeks to roll up an industry, specifically by capitalizing on its high fragmentation and succession issues and further adding value through its focus on recurring non-boat revenues to reduce sales cyclicality and centralization of back-office tech for cost synergies.
OneWater is run by an experienced owner-operator who has spent most of his life in the marine industry. Not to mention he has a ~21% ownership of the company and total insider ownership is close to ~26%. The CEO and COO together are a powerhouse team who came together to kickstart the M&A strategy after the depths of the 2008 recession, capitalizing on the opportunity and steadily continuing to execute to this day with a long runway ahead.
Because of a widespread lack of interest in the marine industry owing to a bad reputation in adjacent industries (i.e., auto manufacturing), high cyclicality, and scars from 2008, investors are simply writing this company off after a cursory glance. A look beneath the surface will reveal a resilient business proactively pursuing recurring revenues and who will look to capitalize on industry issues should a recession occur.
The company currently trades at sub-10x earnings and FCF. At these multiples, you’re getting a competition-beating business that can likely sustain topline growth of at least ~10% p.a. with returns on capital in the low-20s. These valuations seem undeserving and too punitive, pricing in nearly no growth and no room for margin expansion via non-boat revenues.
Company Snapshot
4-year revenue CAGR: 33% (per share: 11%)
2021 ROIC: 20%
Share price: $60.27
Market cap: $813 mn
EV/EBIT: 7.2x
P/E: 8.3x
P/FCF: 8.7x
Introduction
OneWater Marine owns and operates boat dealerships across the United States. The business is highly seasonal as the fall and winter months see the lowest volumes and consequently the highest rise in inventories as dealers stock up for the summer sales season.
The company was born as Singleton Marine in 1987 and throughout the 1990s and early 2000s, Singleton Marine grew organically, opening new locations at various destination lakes in Atlanta.
It wasn't until the recession hit in 2008 that current CEO, Austin Singleton Jr., realized that many dealerships were operating with no succession plans in place. Many principals relied on the next generation to run the family business but when that didn't pan out, they were stuck. The recession acted as a catalyst for principals to seek an exit and it was during 2008 that Singleton Marine thought to embark on its M&A path. Their strategy is one you’ll see in other fragmented industries; keep the branding, retain the staff, give the principals an out, and let them do what they do best (i.e., relationships and selling).
The Business
Boats, Trade-Ins, and Auctions
Of course, each dealership makes money buying boats from OEMs at a wholesale price, then re-selling them at the MSRP. Looking at some of the large sticker prices you might be surprised to hear that this spread alone, notwithstanding boat accessories, does not always garner high margins.
Another way for dealers to make money is through trade-ins or auctions. Customers can trade in their older boat for a discounted price on a newer boat. The dealer can spin this situation into something profitable if they manage to sell the new boat above its wholesale price and if they sell the trade-in as well. Using auctions, dealers buy boats at heavily discounted prices, fix them up, and then re-sell at a higher profit (hopefully with finance & insurance attached too). Margins on auctions and trade-ins can be moderately higher than new boat sales. Combine discounted prices and the fact that dealers can better estimate the value of the boat better than the typical customer, and you’ve got higher margins.
Non-Boat Revenue
When you buy a boat, you don’t just walk out with a boat, you walk out with years of maintenance, storage, and insurance costs. Surprisingly, this is the bread and butter of a dealer—not boat sales. Boat sales carry the top line, but non-boat revenues carry the bottom line.
There are three primary non-boat revenue streams: 1) finance & insurance, 2) service & maintenance, and 3) parts & accessories, all of which should see tailwinds because of the huge surge in boating during COVID-19 as dealerships will benefit from the increased demand for parts & maintenance over the next 10 years. Additionally, we’re seeing already that OneWater has taken the opportunity to further diversify its revenue stream into services and marketplaces.
“We believe non-boat sales will be a driver of our organic growth strategy in the future. We have implemented a targeted marketing strategy across our platform focused on increasing new and existing customer awareness and usage of our F&I products, repair and maintenance services, and parts and accessories products.” – Austin Singleton, CEO
The advantage OneWater has over other dealerships is its focus on non-boat revenues. Other dealerships that don’t have the relationships with banks for F&I or the capacity to hire technicians are at a large disadvantage. Your small, private dealerships aren’t always competing over non-boat revenues.
Growth via M&A
There is a profile for successful serial acquirers, and I believe OneWater could fit that profile. Three points I’d like to touch on are its 1) fragmented market, 2) experience and 3) decentralized culture. Lastly, I will also briefly cover its acquisition strategy.
Fragmented Market
The boating industry isn’t consolidated with several market leaders—it’s highly regionalized. There are over 4,000 stores across the nation, the top 4 players earn 18% of industry revenue, and over 40% of dealerships are single operators. I.e., they don’t employ anyone else. ~80% of independent repair shops are single operators as well. Not only does this mean competition isn’t fierce but starting out at such a small percentage of industry sales means that your runway for growth is longer.
Experience
Austin has been in the boating industry since the inception of Singleton Marine and has been through at least two recessions. He’s seen the ups and downs of the business cycle and knows how to navigate this. Austin spotted the opportunity during the 2008 financial crisis and opportunistically bought out other dealerships. We’re seeing him improve the business through a focus on non-boat revenues which are higher-margin and not as cyclical as boat sales. OneWater has maintained profitability and survived two recessions in an industry where a financial crisis can wipe out near half of all dealers. I see this as a solid testament to its resilience.
Decentralized Culture
The common trait among the best serial acquirers has been using a decentralized organization structure and you will see this under the OneWater portfolio too. When stores join the OneWater team, they retain their old branding and employees. Principals often stay on for a few years afterward as well—they’re proven operators who love the job and retain a stake in the business; that’s as good of an employee you’ll get. The key behind decentralization is giving employees a stake in the business and trusting their judgment. After all, they’re the ones on the ground the most, not management.
Acquisition Strategy
The game plan is to look for owners who want a safe exit—they love the job, just not the burden of succession planning and the ancillary work of operations. The stores will also have a strong portfolio of brands, a cultural fit, and status as one of the dominant leaders in the local market. Financially, the preferred target has revenues of $20mn – $30mn, EBITDA of $1mn – $2mn, and 1 – 3 stores. Buy at ~4x EBITDA and reduce that multiple to ~2x within 24 months through back-office synergies, increased F&I sales, targeted marketing, and earn-out target incentives.
Competition
Competition is mostly based on the quality and variety of products first while price usually comes second to features and customization. Why? Because the typical boat customers walks into the dealership knowing they will buy a boat. The total purchase price also costs just enough that small fluctuations in price of a few hundred to few thousand won’t necessarily deter you.
This means dealers offering comprehensive services from sales to repairs have a competitive advantage over sales-only dealers. Not to mention barriers to entry are high due to needing an upfront investment for inventory and sales being seasonal. The number of competitors is more likely to decrease than increase because of high barriers to entry—this is good for resilient dealers and a tailwind for OneWater.
Competitive Advantage
Centralized Back-Office
As part of their acquisition strategy, OneWater centralizes back-office functions such as HR and accounting. In general, these back-office functions are somewhat inelastic to the change in the number of stores, to a certain point. It’s not incredibly scalable but does provide incremental savings as more stores join OneWater. By joining OneWater, the dealer gets access to new technology resources such as inventory management and CRM.
Relationship with OEMs
I believe OneWater is favorably positioned in this relationship because its supplier concentration is low while buyer concentration is high(er) for OEMs it transacts with. The largest brand OneWater buys from represents 11% of its purchases while for numerous OEMs, OneWater represents >30% of its sales. The cost of losing the manufacturer for the company is lower than the cost of losing the dealership for the manufacturer. If the dealer-OEM relationship in the marine industry is similar to the auto industry, I’m also inclined to believe that OneWater has sway within the upstream manufacturing industry.
Culture
Customers don't come first. Employees come first. If we take care of our employees they will take care of our customers." - Anthony Aisquith, COO
Why is culture so important? Because 40% of the company’s sales come from pre-existing customers. Once you develop a level of trust with a dealer, you don’t shop around anymore. The effort of researching, comparing, getting quotes, is worth it the first time around but it gets old quickly. People would much rather find a trusted dealer to go for all their needs. (This is also why OneWater keeps acquired store/dealership branding intact.)
A great culture comprises marginal gains that come to compound over time. It’s difficult to capture in a model, but at the end of the day, a business is its people.
“It's important that every team member treat their stores as if they were owners. We can't ever lose the individuality and personality of the stores.” OneWater Culture Book
To get a better sense of the culture, I would advise anyone to read their publication on employee culture and values.
Investment Proposition
Characteristics of a Serial Acquirer
There is a profile for successful serial acquirers, and I believe OneWater fits that profile. It is operating a niche market which gives it a lot of room to run its playbook. It’s run by experienced operators who have proven that they can withstand a recession (even capitalize on it). And it runs a decentralized operating structure which is key to developing an effective culture and nimble business.
Serial acquirers can often stay hidden from large institutions and at times have their intrinsic values dislocated from market prices. I believe that OneWater is one of those cases.
Rising Exposure to Non-Boat Revenues
Macroeconomic risks are real to dealerships and consumer discretionary businesses. OneWater is being proactive about it and expanding its non-boat revenue streams. During recessions, boat owners tend to shift spending towards maintenance and repairs instead of a new boat. Additionally, parts & services are higher margin and more recurring than boat sales.
Parts & services comprise ~6% of OneWater revenues and the recent acquisition of T-H Marine will lead that to ~16%.
Reinvestment Runway
OneWater makes up <2% of annual industry revenue. The U.S. has over 4,000 stores and a substantial amount of them are privately-owned, mom ‘n’ pops-type shops that are looking to exit the industry. I roughly estimate that OneWater can target ~3,850 U.S. stores. At 70 stores as of September 2021, that leaves OneWater with 1.8% store penetration. I excluded stores from MarineMax and Bass Pro Shops assuming they would not sell to OneWater.
At 1.8% penetration and a market cap of ~US$813mn, there’s still plenty of opportunity to deploy capital into OneWater’s targeted ~4 deals per year.
More (Possible) Reinvestment Opportunities!
Another opportunity would be to invest in marinas. This is speculation on my part as marinas haven't been mentioned by management, but I figure that OneWater might venture into this space as well as MarineMax has. Marinas are boat docks that comprise at the very least, a collection of rentable boat storage spaces but have also come to include fuel stations and repair/maintenance stations as well. Marinas are typically the last of the boating industry to feel the consequences of the recession and the first to recover. Given zoning laws and capital costs, marinas have a durable, local moat as well. You can see how this type of hedge would fit nicely into OneWater's portfolio.
Embedded Optionality
Boats for Sale was launched in the Spring of 2021 and is an online marketplace for boating sales and the goal is for Boats for Sale to become a one-stop-shop for used boat buying with the marketplace, financing services, administrative services, and a blog for guides and reviews.
Not only are marketplaces a great business model because of their network effects, but it provides OneWater the chance to upsell on its accessory services like F&I, warranties, servicing, and documentation.
This is more of a nice-to-have and isn’t a core driver of the business yet. I view this as an embedded option that you get if you invest in OneWater. Buy for the physical business and get the online business for free.
Management
Austin Singleton Jr., CEO, has been with the company since nearly its inception. He is very experienced having spent much of his professional career at various positions from the fuel docks to the floor. I don’t doubt the knowledge that he has accumulated being in the industry for so long has allowed him to succeed and continue to run the roll-up strategy.
Anthony Aisquith, COO, joined the team in December of 2008, a critical moment for the company. Anthony has over 25 years of experience in the boating industry and actually held the Vice President position at OneWater’s competitor, MarineMax, prior to 2008. Anthony was quintessential to forming a successful hiring and employee culture at OneWater.
Austin has a 21% ownership of OneWater while Anthony has 6% ownership.
Valuation and Risks
At the moment OneWater is trading at what I believe to be, an undeservingly low multiple. For example, its P/E at the time of writing this is 8.7x and its P/FCF is 8.3x. Knowing that it can likely grow revenues at GDP-plus rates along a lengthy reinvestment runway, achieve ROICs in the low-20s, and opportunistically scale M&A, OneWater simply seems too cheap.
Cyclicality and Recessionary Environments
The elephant in the room is going to be cyclicality and how the boating industry is tied to macro factors, namely consumer spending which is a function of GDP. We also know that the adjacent auto industry is known for its terrible returns on capital—so isn’t the boating the same or worse? These are the first thoughts that came to my head and I’m sure many investors share the same.
I won’t lie and say that boating is not a discretionary or luxury purchase. It is. And during the financial crisis of 2008, luxury and consumer discretionary industries saw a percentage decline multiples times that of U.S. GDP. However, I will say that the brunt of a recession is borne by OEMs, rather than dealerships. National Marine Manufacturer's Association estimates that since 2005, the percent of boating industry jobs has slimmed down 75%. On the dealer side, however, the same measure is down 40%—owing to some jobs at dealerships such as technicians remaining secure during a recession when people decide to maintain boats rather than buy them. 40% isn’t a pretty number, but you should count OneWater as an exception who kickstarted its roll-up strategy during 2008. As mentioned before, OneWater is also actively looking to shift its revenues towards parts & services by prioritizing the acquisition of service shops rather than dealerships.
Execution Risk and Key Person Risk
We’re still in the early innings of the roll-up and execution risk remains a key concern for me. Whether that manifests itself in overpaying for acquisitions or having trouble integrating and achieving synergies. For example, a pain point during the integration process is onboarding new stores into OneWater’s ERP/CRM system. Mitigating this risk is simply the team’s experience; the team has been at it since 2008 and this gives me the confidence that they will continue so into the future.
COVID Comps
While I do want OneWater to continue its high growth, 2020 and 2021’s revenue growth rates of 33% and 20%, respectively, are tough comps supported by a confluence of supply chain issues and new boating demand during the pandemic. I don’t count on OneWater consistently achieving growth rates of 25% per year. At sub-10x earnings and FCF however, I believe OneWater has a good margin of safety and room for further surprises.
Interesting. Thanks for the write-up