Malibu Earnings: Profit Compression Drives Material Change in Valuation, but Brand Remains Intact

Narrow-moat Malibu is facing its most compressed EBITDA margin profile in more than a decade. Although the firm’s second fiscal quarter results were near expectations, with sales down 38% and an adjusted EBITDA margin of 10.9% (down roughly 600 basis points), it took a haircut to its full-year outlook, sending shares tumbling at a midteens rate. Fiscal 2024 sales are now expected to fall at a mid- to high-30% rate, rather than the high-teens to low-20% path, while EBITDA is set to contract 800-900 basis points (to around 12%), versus 350-450 basis points prior. While the firm has historically displayed operational flexibility to protect margins, the inability to maneuver operating expenses in the near term was a function of the magnitude and rapid onset of the demand downdraft, resulting in a downsizing of inventory in the dealer channel that is likely to take the rest of the fiscal year. This is the culprit in the 25% reduction in our $81 fair value estimate. Even with a lower fair value, shares appear attractive, although admittedly come with near-term risk.