Malibu Boats currently trades at $37.43 per share and has shown little upside over the past six months, posting a middling return of 4.3%. This is close to the S&P 500’s 9.3% gain during that period.

We're cautious about Malibu Boats. Here are three reasons why you should be careful with MBUU and a stock we'd rather own.

Why Do We Think Malibu Boats Will Underperform?

Founded in California in 1982, Malibu Boats (NASDAQ:MBUU) is a manufacturer of high-performance sports boats and luxury watercrafts.

1. Decline in Boats Sold Points to Weak Demand

Revenue growth can be broken down into changes in price and volume (for companies like Malibu Boats, our preferred volume metric is boats sold). While both are important, the latter is the most critical to analyze because prices have a ceiling.

Malibu Boats’s boats sold came in at 1,024 in the latest quarter, and over the last two years, averaged 24.9% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Malibu Boats might have to lower prices or invest in product improvements to grow, factors that can hinder near-term profitability.

2. EPS Trending Down

Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

Sadly for Malibu Boats, its EPS declined by 24.3% annually over the last five years while its revenue was flat. This tells us the company struggled because its fixed cost base made it difficult to adjust to choppy demand.

3. New Investments Fail to Bear Fruit as ROIC Declines

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).

We typically prefer to invest in companies with high returns because it means they have viable business models, but the trend in a company’s ROIC is often what surprises the market and moves the stock price. Unfortunately, Malibu Boats’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

We see the value of companies helping consumers, but in the case of Malibu Boats, we’re out. That said, the stock currently trades at 12.8× forward price-to-earnings (or $37.43 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are better stocks to buy right now. We’d suggest looking at Wabtec, a leading provider of locomotive services benefiting from an upgrade cycle.

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