Even though MasterCraft (currently trading at $19.07 per share) has gained 6.3% over the last six months, it has lagged the S&P 500’s 13.6% return during that period. This might have investors contemplating their next move.
Is now the time to buy MasterCraft, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free for active Edge members.
Why Do We Think MasterCraft Will Underperform?
We're cautious about MasterCraft. Here are three reasons we avoid MCFT and a stock we'd rather own.
1. Decline in Boats Sold Points to Weak Demand
Revenue growth can be broken down into changes in price and volume (for companies like MasterCraft, our preferred volume metric is boats sold). While both are important, the latter is the most critical to analyze because prices have a ceiling.
MasterCraft’s boats sold came in at 565 in the latest quarter, and over the last two years, averaged 30.3% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests MasterCraft might have to lower prices or invest in product improvements to grow, factors that can hinder near-term profitability. 
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
MasterCraft has shown poor cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 11.1%, lousy for a consumer discretionary business.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, MasterCraft’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
We see the value of companies helping consumers, but in the case of MasterCraft, we’re out. With its shares trailing the market in recent months, the stock trades at 14.7× forward P/E (or $19.07 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are superior stocks to buy right now. We’d suggest looking at one of our all-time favorite software stocks.
Stocks We Like More Than MasterCraft
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