Prem Watsa Drifts Deeper Into MasterCraft

Billionaire investor Prem Watsa (Trades, Portfolio), the head of Fairfax Financial Holdings Ltd. (TSX:FFH, Financial), revealed last week he boosted his stake in MasterCraft Boat Holdings Inc. (MCFT, Financial) by 200.37%.

Often called “Canada’s Warren Buffett (Trades, Portfolio),” the guru’s investment strategy is similar to that of the Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) CEO in that his insurance conglomerate purchases entire companies as well as invests its float in publicly traded companies.

According to GuruFocus Real-Time Picks, a Premium feature, Watsa invested in 1.06 million shares of the Vonore, Tennessee-based company on March 17. He now holds a total of 1.59 million shares, which represent 0.58% of his equity portfolio. The stock traded for an average price of $7.41 per share.

GuruFocus estimates Watsa has lost 33.26% on the investment since establishing it in the third quarter of 2019.

MasterCraft

The company, which manufactures recreational powerboats under the MasterCraft, NauticStar, Crest and Aviara brands, has a $137.2 million market cap; its shares were trading around $6.90 on Monday with a price-earnings ratio of 7.14, a price-book ratio of 1.49 and a price-sales ratio of 0.29, which GuruFocus noted are near five-year lows.

The Peter Lynch chart shows the stock is trading below its fair value, suggesting it is undervalued.

In early February, the boat maker reported its second-quarter 2020 financial results. MasterCraft posted adjusted earnings of 43 cents per share on $99.6 million in revenue, which were down from the prior-year quarter.

In a statement, CEO Fred Brightbill said that after collecting feedback from “customers, dealers, employees, business partners and investors” in regard to their opinion on MasterCraft’s strengths and future opportunities, the company has implemented a new strategic growth plan that will “focus on improving the customer experience, expanding brand awareness, further advancing operational excellence and developing a customer-focused culture.”

“I am confident that with a renewed focus on these initiatives, MasterCraft will be better positioned to increase our share of the boating market across all our brands and generate significant value for the Company and our shareholders,” he said.

With the outbreak of the Covid-19 virus, the company announced on March 25 that it is taking measures to protect the company itself along with its employees, dealers and communities, which include suspending manufacturing operations, increasing its available liquidity and financial flexibility and withdrawing its guidance for the full year.

“In this challenging market, MasterCraft continues to work closely with dealers to help manage their inventory levels and support the overall health of their businesses,” Brightbill said. “We are monitoring the situation closely, and stand prepared to take additional action as necessary to position MasterCraft and its stakeholders for success over the longer term.”

GuruFocus rated MasterCraft’s financial strength 5 out of 10 on the back of adequate interest coverage. The Altman Z-Score of 2.58, however, indicates the company is under some financial pressure since its assets are building up at a faster rate than its revenue is growing.

The company’s profitability fared better, scoring an 8 out of 10 rating on the back of an expanding operating margin. MasterCraft also has strong returns that are outperforming a majority of competitors, as well as a moderate Piotroski F-Score of 5, which implies business conditions are stable.

With an 8.48% stake, Watsa is now the company’s largest guru shareholder. Chuck Royce (Trades, Portfolio) and Jim Simons (Trades, Portfolio)’ Renaissance Technologies also have positions in the stock.

Portfolio composition and performance

Over half of the Canadian guru’s $2.03 billion equity portfolio, which consisted of 41 stocks as of the end of fourth-quarter 2019, was invested in the industrials sector, followed by smaller positions in the technology (16.63%) and real estate (14.70%) spaces.

Other companies in the vehicles and parts industry that Watsa owned as of Dec. 31 were Garrett Motion Inc. (GTX, Financial) and General Motors Co. (GM, Financial).

According to GuruFocus data, Watsa’s firm returned 14.8% in 2019, underperforming the S&P 500’s 31.48% return.

Disclosure: No positions.

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