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Analyzing the analyst

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An old saying you used to hear with some frequency was that all you needed to get into the boatbuilding business was a barrel of resin and a shed. It’s not that easy anymore, but you get the idea.

The low hurdle to entry was mentioned in a note published Monday by RBC Capital Markets analyst Edward Aaron on so-called “misconceptions” regarding Brunswick Corp. We carried a report on the commentary in Monday’s Trade Only Today e-newsletter.

Aaron referred to boatbuilding as a “low-barrier-to-entry business with limited scale opportunity,” factors that might explain the lowfailure rate of builders during the recession. The context was RBC explaining why it doesn’t believe boatbuilding is the strongest part of Brunswick and how a so-called “reframing” of Brunswick’s business could make the company’s stock a good bet, with or without a near-term industry recovery.

RBC notes that Brunswick’s engine and fitness divisions account for the vast majority of the company’s earnings and value. Compared with boatbuilding, those businesses have much higher barriers to entry and “reward good technology and innovation,” RBC says. And they are less cyclical.

As we eventually get on a road to recovery, you’ll see the “technology and innovation” theme featured ever more prominently in the products and businesses of the market leaders across our industry. It’s inevitable, especially given another trend: Boaters in increasing numbers expect new boats to be equipped like new cars when it comes to content, features and turn-the-key reliability.

But remember that to produce quality, reliable boats, the design, layout and construction of the hull — especially in larger boats — will remain critical to the integration of “innovative” systems, from propulsion to electrical. It all has to work together, and building a cored, resin-infused hull is not exactly like building a bathtub. So there will remain notable exceptions.

Another trend that emerges in the analyst’s discussion is one we’ve talked about here from time to time. People are continuing to downsize, and, as such, small boats are doing better than large ones.

“Boating industry sales trends are currently bifurcated, with smaller boats recovering and large boats still in decline,” the commentary notes.

The firm writes that the traditional pattern of large boats following small boats in and out of cycles doesn’t seem to be holding this time for three reasons. I quote here directly from the note:

1. With the help of easy credit and the housing bubble, many prospective large-boat buyers traded up beyond their means prior to the recession and are currently upside down on their boat loans (and potentially their home loans, as well).

2. Considering larger boats drove most of the demand prior to the downturn, the fleet of large boats is much younger than the fleet of small boats. As a result, the preowned market will likely remain active for some time.

3. A dour economic outlook has a self-fulfilling impact on this market segment in particular. If these customers sense a weaker environment ahead, they may either decide not to trade or hold out for discounts (which likely won’t be there this time around).

The outlook for 2012 will be much like what we’ve seen this year, analyst Aaron predicts — flat sales, with small boats outpacing larger ones and Brunswick continuing to take market share.

“While the current macro data would ordinarily suggest potential for industry declines, the ‘law of small numbers’ suggests the current demand base will be much more stable,” according to RBC. “With demand roughly 140k units, down nearly 50 percent from the 2005 peak, the boating industry is hovering near all-time lows.”

Flat demand, combined with an aging fleet of recreational boats (and, I’d add, much reduced inventory levels), “should keep a floor under current levels of demand” and make it unlikely we’ll see a double-dip in our industry.

Can you really call that a silver lining?



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