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Investors react to Brunswick’s revenue miss in the engine segment

CEO David Foulkes stressed that high-margin, premium brands like Boston Whaler have seen strong demand.

CEO David Foulkes stressed that high-margin, premium brands like Boston Whaler have seen strong demand.

Brunswick Corp.’s first-quarter miss on engine revenue and reports of value boat sales declines — both likely due in part to bad weather — sparked a nearly 11 percent drop in the company’s stocks yesterday, prompting analysts to double down on their buy rating.

“I think the main factors are, obviously, we are seeing some weather-related slowness,” said Brunswick Corp. CEO David Foulkes, during a call Thursday to discuss first-quarter results. “I would say the other thing that we're seeing is premium categories had pretty healthy demand, though there was some softness in the value categories. That plays well for us because we have a very healthy portfolio of aspirational brands.”

Bad weather across most of the United States, which pushes the boating season later, drove the company to be somewhat more conservative in projections, said Foulkes.

“Certainly the delay in getting boats in the water just delays the point at which a lot of P&A sales occur, because most of those P&A sales happen when the boat goes in the water,” said Foulkes.

The slowdown in less-expensive boat sales ultimately affects engine sales, but Foulkes emphasized that the premium brands are performing well.

“if you look at what's happening particularly in the value segment, a lot of value OEMs use Mercury product,” said Foulkes. “So I think the area where I want to push around, in terms of market share gain and margin improvement, is really in the premium brands [driving that]. So a unit of 420 Boston Whaler Outrage is not the same as a unit of 18-foot aluminum boat. I just want to make sure that we pay sufficient attention to that as we go forward with these discussions.”

Wells Fargo analyst Tim Conder asked whether price increases, caused in part by tariffs, had caused a drag on value boat sales.

“It's possible that that's part of the equation,” said Foulkes. “Sometimes it's difficult to deconstruct exactly what's going on there. I wouldn't say that it's a dominant theme. I think the theme at the moment is much more of a weather effect.”

Several dealers have enlisted promotions to move those boats, said Foulkes; MarineMax, Brunswick’s largest boat distributor, announced during its earnings call Thursday that it had been investing more in promoting those boats.

Foulkes confirmed during the call it has solid buyer interest in its fitness segment and expects to find a buyer in the second quarter. That, and the health of the premium brands, caused analysts to issue notes continuing to emphasize their buy rating, albeit with some price target adjustments.

“We feel investors have sold Brunswick shares to unbalanced levels by overly focusing on prudently, modestly-lowered 2019 marine top-line guidance, and the ‘how’ of unchanged operating guidance, while ignoring a likely imminent fitness separation,” wrote Conder in a report.

“In our view, today's dismal stock reaction, down 11 percent versus a flat S&P 500, was almost entirely based on the engine business,” wrote SunTrust analyst Michael Swartz. “Given the first-quarter revenue miss in that unit — albeit, more than offset by much stronger-than-expected margins — as well as a slight downward revision to segment growth expectations in 2019, this was enough to spook investors.”

Brunswick’s and MarineMax’s comments on weakness in value product also might have drawn concerns about the overall health of the marine industry, he said.

“While we certainly understand the concerns that surfaced today, we also believe that Brunswick’s major marine profit pools — premium boats, high-hp outboard engines, P&A — remain healthy,” wrote Swartz.

Brunswick stocks closed at $48.50 Thursday, versus the previous close of $54.48.

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