B. Riley & Co. says the U.S. new-boat market has not delivered more than three consecutive years of unit growth since 1980 and boat ownership in the developed world is “secularly stagnant, at best,” leading the company’s analysts to caution investors against placing “a sizable multiple” on Brunswick Corp. stock.
“The unprecedented plunge to record lows from 2005 to 2010, followed by an anemic economic recovery, has set up an unusually protracted cycle, in our view, but by 2016 the industry will likely have strung together six consecutive years of growth,” B. Riley analyst Jimmy Baker wrote in a report released Friday after Brunswick officials updated investors on the company’s long-term plans.
“As constructive as we’ve been on the new-boat recovery, we find ourselves in clear disagreement with Brunswick Corp. bulls on the topic of operating leverage,” Baker wrote.
Earnings before interest and taxes have been in “a relatively steady slide since the February 2013 Miami [International] Boat Show,” Baker wrote. “This disappointment has stemmed primarily from disappointing sales,” which have tracked below Wall Street expectations, but not below company guidance.
The failed turnaround at Cabo and Hatteras Yachts, Brunswick’s market share losses, and operation execution might all be contributing factors, but Baker believes the product mix is the “overriding culprit.”
“Brunswick’s outboard boat brands — which have seen growth — have thus far demonstrated an inability to offset fiberglass sterndrive/inboard losses, even in the post-Cabo/Hatteras era,” Baker wrote.
The expectations bestowed on Brunswick, given its performance relative to the prior plan, are “uncomfortably high” to B. Riley investors, Baker wrote. However, that does not take away from the strong outlook offered last week, he wrote, which several analysts deemed conservative.
“As we review the plan, we believe it could prove slightly conservative, simply due to its primary end market (the U.S. new-boat market) outperforming, but doubt that leverage will dramatically exceed BC’s projections, even if revenue upside is presented,” Baker wrote.
The firm downgraded Brunswick from a “buy” rating to “neutral” last spring.
In the overall boat market, Baker expects outboards to continue to lead the unit charge, “but on a percent basis, inboard cruisers could lead the recovery from here,” he wrote. “We also see sterndrive improvement in 2014 [and beyond].”
The company anticipates that 194,000 new units will be sold in 2016, compared with 153,000 in 2012.
— Reagan Haynes