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Righting The Ship

First by land, then by sea.

And you thought the housing slump was bad. The $37 billion recreational boating industry has been fighting off a bust since 2005.

Like the once red-hot real estate market, the boating business profited from low interest rates and a confident consumer over the past few years, perhaps, analysts say, getting ahead of itself, only to suffer a hard landing.

Retail powerboat dollar sales fell an estimated 4% to 6% in 2006, while unit sales are down 5% to 7%, according to the National Marine Manufacturers Association. Now, as the summer boating season gets its annual setup with the Miami International Boat Show this weekend, industry insiders are expecting another down year as companies continue to weather a storm of soft demand and ballooning inventories.

“We’re staying away from the ‘let’s make a deal’ approach. That cost us some margins,” says Bill McGill Jr., CEO of MarineMax, the largest boat retailer and dealer in the U.S., which has 150 vessels on display in the show. “It’s not about selling boats. It’s about selling a lifestyle, about getting the family involved, and how MarineMax fits into that equation.”

“The uncertainty in the housing and condo markets is what’s been slowing down people’s decision to buy boats,” added McGill, who says that higher interest rates and gasoline prices have also done a lot to make buyers cautious. “They aren’t deciding not to buy boat, but they want to wait and see until the situation fizzles.”

To draw customers into showrooms, boat retailers are stepping up promotions and rebates, similar to MarineMax’s highly successful "World's Largest Boat Sale" promotion last summer. Companies are also appealing to a broader demographic. While the average boater is a middle-aged, higher income male who lives in a warm climate and near water, MarineMax is promoting boating as a family activity, offering programs to get women and children into the market.

“They’re trying to gain market share of entry-level boat buyers at lower margins,” says Laura Richardson, a leisure analyst with BB&T Capital Markets, who has a “hold” rating on MarineMax, which controls 5% of the market. “Earnings are down because of that. But in the long term, it should serve them well. The thinking is that once they get them in the family, they will stay with them.”

MarineMax, which sells everything from 11-foot Boston Whalers to 400-foot megayachts, has adopted a more aggressive marketing strategy to cushion itself from a hard fall this year. In January, the company cut its full-year guidance by 31%, sinking boating stocks. Companies underestimated the impact of macroeconomic factors and set expectations too high, resulting in these downward revisions, says Jonathan Cramer, a senior research analyst for Cowen and Company.

“In the longer term, the industry needs to rationalize the number of deals and take a more reasonable approach to demand,” he said.

The correction is not as drastic for Brunswick, the world's largest maker of recreational boats whose biggest customer is MarineMax. The company is cutting back production to control inventories, streamlining operations amid its various acquisitions and incorporating more cutting-edge manufacturing technology. Brunswick recently announced it is selling its marine electronics operations to Norway-based Navico International. Terms were not disclosed.

“Brunswick will be more profitable when sales turn around,” says Richardson, who has a “hold” on the company. “It’s still in the second or third inning in terms of manufacturing and operation efficiency, but it’s getting there.”

Analysts point out that it hasn’t been smooth sailing since 2005. After enjoying strong growth in 2002, the industry began to slow down at the low-end of the market, a trend that drifted upward to the high-end. As is the case with other industries, the ultra high-end – megayachts – is the only segment unaffected by the trend.

Making things worse this time around are high commodities prices, which eat into profit margins. Higher oil prices, for instance, increase the cost of making the fiberglass and resin that go into building boats. Brunswick rival Marine Products has missed analysts’ earnings targets for three straight quarters.

While some insiders say this year is the worst yet for the industry, others point to the tough times during the post dot-com recession.

“Going back 100 years, there’s been a five-year cycle in the sale of boats,” noted Thom Dammrich, president of the National Marine Manufacturers Association. “It’s up and down. We will be up next year.”

Like the housing slump, the boating downturn may be nearing its end.

“Hopefully, this is the worst year we see this decade,” BB&T Capital Markets analyst Richardson said. “The industry expects to show growth in 2008 but that’s a long way off. A lot can happen between now and then.”

Editor’s note: BB&T Capital Markets makes a market in the securities of West Marine and does investment banking services with Brunswick, MarineMax and West Marine. None of the analysts own shares in any of the companies mentioned.

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Annalisa Burgos is a features reporter/editor for CNBC.com. She can be reached at Annalisa.Burgos@nbcuni.com.

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