Betting on a boat boom? You don’t need to buy a yacht

Bulls & boats ... & yachts

If it floats, it's better to rent than own—that was never truer of yachts and boats than after the financial crisis struck. But several years on, signs are emerging that the new boat market will finally return, potentially creating an opportunity even for practical investors.

Boating is perhaps the most cyclical consumer sector imaginable. Vessels are expensive to purchase, time consuming and completely discretionary. So the moment consumer confidence began to slip, so did boat sales. The largest listed boating company, Brunswick, saw its marine sales peak in 2006, not long after its shares reached their all-time high.

The boat market has recovered little ground since then. In 2013, new U.S. unit sales of outboard motor boats were 64 percent of their prior peak, while some varieties of inboard motor boats were at just 18 percent of their highs, according to Tim Conder, an analyst at Wells Fargo.

Sea Ray 350 SLX
Source: Sea Ray | Facebook

But investors who look more closely at the boating industry may see that demand is alive and well. The real problem holding the sector back is a glut of supply.

When the crisis hit, many boat owners who weren't seriously rich became eager to unload what they didn't need. That created a flood of used but still relatively young boats on the market at deeply depressed prices. The result was that used boats became far more attractive than new boats to potential buyers. At the same time, owners who wanted to sell or exchange their existing boats had less money to use toward new purchases.

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But sooner or later, the supply of attractive used boats is bound to run short. While new boat sales volume is still depressed, used boat transactions are happening as frequently as ever. On its most recent earnings call in January, Brunswick said that used boat sales transactions surpassed pre-crisis levels in 2012 and likely did so again in 2013.

One key catalyst: Boats eventually get too old to buy. Indeed, Conder points out that consumers only tend to buy boats that are under 25 to 30 years old. That's important because the number of boats manufactured after 1990 declined sharply as companies tried to focus on larger vessels.

The upshot is that the used boat market, currently around 800,000 units annually, could contract by 180,000 units in 2015, Conder estimates. That could shift a huge amount of demand to the new boat market, currently under 200,000 units.

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Financing also doesn't appear to be an impediment to new boat purchases. While lenders have become more prudent since the crisis, they tend to require a 15 percent to 25 percent down payment, which hasn't been a major issue for dealers, according to Gregory Badishkanian, an analyst at Citigroup.

A pick up in boat sales would likely deliver an immediate and long-awaited boost to Brunswick's profits. While the company has streamlined its costs, the boat division still booked a slight operating loss in 2013 on roughly $1 billion in sales.

Of course, some larger boats, such as those longer than 50 or 60 feet, might take longer to recover. But Brunswick has pared back its exposure to that segment with last year's sale of its Hatteras and Cabo brands of motor yachts. It has also designed and manufactured some new models in the yacht category within the brands it has kept.

At the same time, Brunswick has focused on some slightly smaller boats like its Sea Ray 350 SLX, which is about 35 feet long. Such boats are intended more for daytrips than for sleeping and have smaller cabins but much more deck area. The company said in January that the 350 SLX was completely sold out and it is ramping up production.

And while very large boats tend to have better margins for Brunswick, the company won't necessarily be hurt by a shift toward smaller boats—even if it doesn't manufacture them. The company's marine engine division generated more than $2 billion in sales in 2013 and its products can be used on a variety of different boats. That division accounted for the majority of the company's operating income last year, with a 14 percent operating margin.

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Given the healthy demand for boating, the real risks for Brunswick are a falloff in consumer confidence or a sharp decline in equity markets that makes many of its customer feel poorer. With the stock trading at 15 times consensus 2015 earnings, and so much potential to sell new vessels, Brunswick shares look like one boat investment worth considering.