MasterCraft’s 10.8% return over the past six months has outpaced the S&P 500 by 6.1%, and its stock price has climbed to $20.09 per share. This run-up might have investors contemplating their next move.

Is there a buying opportunity in MasterCraft, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Is MasterCraft Not Exciting?

We’re happy investors have made money, but we don't have much confidence in MasterCraft. Here are three reasons why MCFT doesn't excite us 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 619 in the latest quarter, and over the last two years, averaged 40.6% 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. Cash Flow Margin Set to Decline

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Over the next year, analysts predict MasterCraft’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 14.8% for the last 12 months will decrease to 8.3%.

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. Unfortunately, MasterCraft’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

MasterCraft isn’t a terrible business, but it doesn’t pass our bar. With its shares beating the market recently, the stock trades at 16.1× forward P/E (or $20.09 per share). Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're pretty confident there are superior stocks to buy right now. Let us point you toward one of Charlie Munger’s all-time favorite businesses.

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