MasterCraft’s 17.4% return over the past six months has outpaced the S&P 500 by 6%, and its stock price has climbed to $25.08 per share. This was partly thanks to its solid quarterly results, and the run-up 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? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think MasterCraft Will Underperform?
Despite the momentum, we’re cautious about MasterCraft. Here are three reasons why MCFT doesn’t excite us, plus one stock we’d rather own.
1. Revenue Spiraling Downwards
A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. MasterCraft’s demand was weak over the last five years as its sales fell at a 6.7% annual rate. This wasn’t a great result and is a sign of poor business quality.
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 relative to peers over the last two years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 7%, below what we’d expect for a consumer discretionary business.
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).
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 beating the market recently, the stock trades at 13.5× forward P/E (or $25.08 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are superior stocks to buy right now. Let us point you toward a dominant aerospace business that has perfected its M&A strategy.
Stocks We Would Buy Instead of MasterCraft
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