Forecasts in the Marine and Outdoor Enthusiast Sectors: Assessing the Crystal Ball and Gauging the Accuracy of Market Predictions

By: William J. O’Flaherty, Managing Director, Matt C. Oldhouser, CPA, Senior Associate
Consumer & Industrial Investment Banking Group

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It seems like we don’t need to look far to find some degree of pessimism regarding the near-term economic outlook. Whether on a macro-level, with interest rates, inflation, and banking volatility weighing heavily on the minds of prognosticators; or on a market-by-market level, with industry-specific headwinds (e.g. supply chain disruptions) impacting forecasts, it’s hard to avoid negativity in outlooks. But how much credence should we put in the opinions of those looking to predict what comes next? It’s a complex question, but one we’ve attempted to respond to in this issue of the Capital Markets Perspective, where we examine the past performance of research analysts in predicting future performance within the marine and outdoor enthusiast markets. More importantly, we discuss the takeaways for business owners and operators given today’s forward-looking market performance and how that might impact operating, financing, and advisory decisions for various stakeholders.

Explanation of Methodology
Fortunately, for almost any market, there’s a rich history of expected company/market performance data which can be compared to actual results. Perhaps the most visible points of reference are the research analysts that cover publicly-traded companies and the performance of the operating businesses themselves. For better or worse, research analysts go “on the record” with their predictions of what will occur in the future. In response, we’ve taken a scorecard approach to how well they’ve done in the past as a possible indicator of how we can assess their current outlooks.

Research analysts tend to be experts in specific industries and provide investment recommendations to retail and institutional investors. These recommendations are informed by public information produced by companies, access in the form of conference calls and interviews with management, as well as the analyst’s own research and assessment of future performance. Inherent to their evaluation is forward-looking revenue and earnings, which tend to be primary drivers of value for a business and the investors contemplating ownership. It’s in these critical metrics where we’ve built our analysis.

The universe of research analysts that cover any given company may have slightly differing opinions of where revenues or EBITDA may shake out in the future, but taken in aggregate, there is a consensus of those metrics. Consensus tends to be measured as the median value of all the available data points from the analysts. When assessing this data, the most influential, and most often utilized, time period for review is the outlook one year from the forecast date, which is referred to as the “one year forward looking” or “next twelve months” (NTM) outlook. These figures can often be influenced by the officers of companies who provide public guidance by offering their own operating or financial metrics in an effort to illustrate their own expectations. But despite operating from the same sets of public information, research analysts nevertheless may come to differing conclusions. Therefore, the need to use consensus medians provides the most consistent picture of all experts’ “predictions” of future performance of companies.

In our analysis, we’ve taken a representative sample size of public industry participants in the marine and outdoor enthusiast space, and aggregated previous analyst expected performance to create a full market perspective. In other words, we’ve taken several larger market participants, looked at how accurate research analysts have been in predicting performance, and used those findings as an illustration for the broader market. You may ask yourself how a segment of companies could possibly be representative of an entire industry, which is a very fair inquiry. To guard against this, we’ve included a sample of companies that cross over several areas: (i) the production and sale value-spectrum (manufacturing, distribution, retail, aftermarket, etc.); (ii) geographic presence (domestic and international); and (iii) market segments (boating, recreational watercraft, etc.). While no sample set of public companies will be entirely representative of an industry in totality, we are comforted in knowing that our universe was thoughtfully curated to include players that generally illustrate the trends in the greater marine and outdoor enthusiast marketplace.

We’ve taken this universe of companies and viewed a 15-year historical period to match NTM analyst revenues and EBITDA against the actual performance of each of the companies. We’ve done so four times in each year (on a quarterly basis) as those tend to be the points where companies provide additional earnings information and analysts often update their NTM assessments. As represented below, companies sometimes move in and out of our sample universe for what is a fairly obvious reason: not all companies were public for the full 15-year historical period. As IPOs occur or companies are taken private, we’ve updated the sample group to reflect the most current companies with available data.

Over time, median actual performance has mirrored predicted performance with remarkable consistency. That’s not to say there haven’t been periods where analysts may have overestimated or underestimated the market, but on balance, it’s been quite accurate. To recap, based on these findings, consensus research estimates are highly predictive of public company performance (in aggregate) for future years.

Certainly, a portion of that accuracy is attributable to what we commented on earlier: guidance from the companies themselves. It becomes a slightly easier exercise to forecast future performance when the companies show you the answer key. Nevertheless, even the companies are subject to greater market forces and sometimes their own estimates don’t ring true, which is why research analysts should be applauded for their overall accuracy. Moreover, we as observers should feel confident in utilizing these findings to direct decision-making in these specific markets.

General Observations

Revenue estimates have been remarkably predictive, with a median actual performance compared to expected performance of 1.5% over the 15-year period that was studied. In other words, in totality, actual results were only 1.5% higher than expected results (as represented by NTM revenue estimates).

We recognized slightly larger variances of predicted EBITDA versus actuals in the sample that was reviewed. Interestingly, consensus estimates of EBITDA overstates actual results by 6.2% over this time period. So while revenue tends to be highly predictive of actual results, profitability tends to be lower than expectations. We view several items as contributors to this variance. First, despite the importance of EBITDA to businesses and the finance community, it is a metric that is likely of secondary importance to the research analyst community. Clearly, there’s a degree of focus to the metric, but revisions to NTM EBITDA estimates tend to occur less frequently than those to revenue and earnings per share (EPS) which one could argue are more influential to the retail and institutional investing communities. Second, EBITDA is a much more highly complex metric to forecast than revenue and therefore an inherently more difficult figure to accurately predict. The number of variables impacting EBITDA are far greater than those impacting revenue.

Most interesting to us was that analysts tended to be too optimistic in their expectations of EBITDA. This may be a result of inherent biases and a belief that operators will be able to make continual operational improvements to enhance margins in good times or become more cost-conscious during weaker periods, each as a reaction to the current and budgeted performance of their businesses. Whether this is the true underlying cause of this optimism or there’s a separate explanation, observers should take heed of this trend when analyzing the current market forecasts and ultimately making decisions based on them.

Additional Observations
As depicted in each of the charts above, there were much more meaningful variances on both metrics during two significant periods of our study: The Great Recession and the COVID-19 Pandemic. From late 2008 – early 2010, actual results of revenue and EBITDA underperformed materially relative to expectations. That tracks with logic as consumers slowed discretionary spending to a point where new boats and watercraft were not highly sought after. Similarly, during the early COVID lockdowns, when society was understandably more focused on health rather than leisure activities, spending in the outdoor enthusiast markets waned. As we all know though, demand for outdoor activities quickly came roaring back, causing a total shift in the dynamic, where analysts meaningfully underestimated the performance of the market. In fact, the demand by consumers was so great that analyst expectations and actual results are only now back at equilibrium.

While we can grant a little leniency to the analysts for not foreseeing the greatest economic downturn of our lifetime or a global pandemic in their crystal balls, it nevertheless drove us to dig deeper into certain segments of the data to understand the nuances that may drive higher variances. Are estimates only valuable when the stakes are lower or when growth/contraction can be more accurately predicted? Does consensus grow stronger if there’s greater coverage on a company? We continue to investigate these questions below.

Segmented Findings
Periods of Growth Versus Contraction
Despite the broader indication that market expectations are fairly predictive of future performance, we naturally wanted to understand if these prognostications were more or less accurate at predicting downturns or upturns. Would our general observation of accuracy be different if we isolated the information when analysts were optimistic versus when they were pessimistic?

Interestingly enough, this segmentation enhanced the performance of the analysts when considering directional expectations. In periods where there was an expected upswing in market performance, actual performance was 1.5% higher than expected. In situations where a contraction was expected, actual performance was 0.9% lower than predicted. To summarize, when isolating specific economic cycles, the anticipated performance of the NTM expectations relative to actuals is as strong or stronger than the data in totality. Digging deeper, while the analysts’ predictions are directionally accurate, they tend to be more conservative in their expected market swings than actuals (i.e. positive revenue momentum tends to be greater than predicted, while negative revenue momentum tends to be worse than anticipated).

Scale of Third-Party Research Coverage
Similarly, we investigated whether having more robust analyst coverage (i.e. more research analysts covering a business) would enhance the performance of the consensus or dilute it. Generally, logic would dictate more opinions in the mix would drive better performance and, in our analysis, it certainly did.

As with the investigation above, by further segmenting the data, we see a degree of higher overall volatility, simply due to possessing a smaller sample size. Nevertheless, when taking the long-term average of the information, more broadly covered companies tend to have analysts (or at least a consensus) that are more skilled at assessing future performance. In our study, for companies that had on average more than six analysts estimating their performance, the consensus estimates were only 0.5% different than actual performance. However, for companies with average coverage of less than six analysts, the estimates were 4.7% different than actual results. In general, larger, more established companies tend to be more widely represented in the research analyst community, which does create a degree of selection bias. Still, those companies oftentimes represent the core constituents of a given market with highly influential performance indicators, and given our goal of trying to assess predictive signs for the market as a whole, we feel these findings are beneficial.

With analysts predicting a 0.4% decline in the next twelve months for revenue and 1.1% decline in EBITDA, how should operators and owners react? The data above clearly indicates a strong correlation of analysts accurately predicting marine and outdoor enthusiast market downturns, so the likelihood of a pullback seems high. Moreover, it appears that analysts tend to underrepresent: (i) the magnitude of downturns; and (ii) the EBITDA impact felt by companies. While it’s not a certainty, these datapoints do illustrate a need for preparedness on the parts of operators and owners.

First, it would be prudent to take all rational business precautions that don’t limit the long-term trajectory of operations. Depending on the business model, we would encourage operators to evaluate headcount and inventory levels proactively. Similarly, it may be sensible to evaluate meaningful capital expenditure commitments in the near-term if those assets are less likely to be fully utilized in a possible market pullback. The modest expectation of revenue decline likely does not accurately portray the degree of risk. In a high inflationary environment, this modest reduction in revenue likely translates into a much more meaningful adjustment of units produced and sold, therefore creating a much more meaningful operational impact.

Second, it may be an optimal time to reexamine your company’s capitalization and whether it’s appropriate for what may be a somewhat turbulent period. The debt and equity capital markets, while not as active as the prior 24 months, very much remain open and eager to support businesses with long-term trajectories. Even if the decision is to maintain the status quo, there are still levers to pull that could be beneficial, including reexamining covenants and other liquidity terms.

Lastly, the negative expected sector performance may adversely impact the M&A and capital raising markets in the boating and outdoor enthusiast markets. Given that these industries have historically been perceived as driven by consumer disposable income and discretionary expenses, leverage levels have tended to be reasonably conservative for operators in this market to begin with. That said, with COVID enhancing consumers’ desires for outdoor experiences in a seemingly transformative way, we see investor and lender interest in the market growing. Investor demand for less-cyclical, enthusiast driven operators in the marine and outdoor marketplaces has driven meaningful M&A and investment activity over the past 24 months – more so than at any point in recent memory. Still, the anticipated market performance over the next 12 months may suppress valuations in the near-term, both in transaction multiples and overall value (particularly viewing likely lower EBITDA and earnings, as outlined in this document). Nevertheless, we’d be remiss if we didn’t highlight how exceptional present-day valuations compare to those achieved or assumed historically. The marine and outdoor enthusiast sectors, in aggregate, remain at or near all-time highs when measured by sales or profitability. Even with the possibility of slightly dampened transaction multiples, the ability to achieve an outstanding exit or sale outcome remains exceptionally high for private and public enterprises.

As we outlined earlier, these aren’t one-size-fits-all results, but intended to be representative of the entire marketplace. The timing and magnitude of positive and negative momentum in the market is likely different for retail players versus aftermarket companies due to differences in their operational models, customer bases, and other dynamics. Similarly, boatbuilders will likely feel different impacts of a market correction than recreational watersports focused companies. Regardless, as players in the same or similar ecosystems, the findings held here can be directionally instructive and should be heeded when considering operational, financial, and capital markets alternatives.

About Matrix Capital Markets Group, Inc.
Founded in 1988, Matrix Capital Markets Group, Inc. is an independent, advisory focused, privately-held investment bank headquartered in Richmond, VA, with additional offices in Baltimore, MD and New York, NY. Matrix provides merger & acquisition and financial advisory services for privately-held, private-equity owned, not-for-profit and publicly traded companies. Matrix’s advisory services include company sales, recapitalizations, capital raises of debt & equity, corporate carve outs, special situations, management buyouts, corporate valuations, and fairness opinions. Matrix serves clients in a wide range of industries, including automotive aftermarket, building products, car washes, consumer products, convenience retail, downstream energy, healthcare and industrial products. For additional information or to contact our team members, please visit

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