3Q results disappoint Brunswick - Trade Only Today

3Q results disappoint Brunswick

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Brunswick Corp. lowered its earnings expectations in part because of sluggish demand for its boats from 41 to 65 feet, such as this Sea Ray Sundancer 510 Fly, in the second and third quarters. 

Brunswick Corp. lowered its earnings expectations in part because of sluggish demand for its boats from 41 to 65 feet, such as this Sea Ray Sundancer 510 Fly, in the second and third quarters. 

Brunswick Corp. was disappointed with its third-quarter results, which were challenged both by boat production slowdowns caused by Hurricane Irma and a continued lag in demand for large sterndrive/inboard fiberglass boats, as well as in the fitness segment.

“We’re very disappointed that we’re below our initial targeted range and are developing and executing against plans to make sure we meet or exceed these adjusted expectations and continue to deliver strong shareholder returns,” Brunswick CEO Mark Schwabero told investors and analysts in a conference call Thursday to discuss the results.

Sluggishness in sterndrive and inboard fiberglass boats from 41 to 65 feet continues to challenge operating margins in the company’s boat segment, Schwabero said.

“In the short term we do not expect demand for large fiberglass sterndrive inboard boats to materially improve, partially due to the hurricane impact,” Schwabero said. “Consequently, headwinds related to weak retail and associated large-boat pipeline reductions will likely continue into 2018.”

As a result, Brunswick is operating with the view that “we’re probably going to be shipping [those larger units] at wholesale, below retail, for some period of time into 2018 until we see some change in what the market’s doing,” said Brunswick CFO Bill Metzger. “Our view today is, if that’s a market that’s going to continue to be a little bit more challenged … we’re probably going to be operating at wholesale, below retail.”

However, the company anticipates the performance of that segment will improve as warranty adjustments recorded in the first half of 2017 are “not repeated” and as manufacturing efficiencies improve and the company realizes benefits from cost reductions.

“The retail market was also negatively affected by the August and September hurricanes and that will likely have an impact on the rest of the year,”

“The affected areas make up approximately 25 percent of U.S. retail sales from the start of September through the end of the year, with those four months constituting about 15 percent of the total retail sales in the United States for the year,” Schwabero said. “We expect the replacement activity related to damaged boats taking up to 18 months, potentially resulting in a slight tailwind as we move through 2018.”

Brunswick reported its results on Thursday and lowered its earnings expectations to a range of $3.85 to $3.87 a share, down from previous expectations in the range of $4 to $4.10 a share.

Shares were trading off as much as 15 percent on Thursday as a result, which financial analysts across the board characterized as an overreaction by Wall Street.

“This was a lot to digest and we believe some investors have 'thrown in the towel' after several shaky quarters in a row,” wrote Michael Schwartz, vice president of equity research at SunTrust Robinson Humphrey, in a report discussing the company. “That said, Q3 was as not bad as the reported numbers suggest, nor do we believe there has been a deterioration in Brunswick’s end markets versus just three months ago.”

B. Riley analysts viewed the issues Brunswick was facing as short-term and called the 15 percent stock decline “excessive.”

“While the impacts of the hurricane were unfortunate and understandable for Brunswick’s position in the boating industry, we believe there was not any sustainable damage and we understand production is ramping to bring levels back to where they were pre-hurricane,” wrote B. Riley & Co. senior analyst Eric Wold in a flash report.

“As for the continued weakness in large sterndrive boats that was first signaled by Brunswick earlier this year, we believe management is making the prudent decision to assume this weakness continues throughout all of 2018 and assume that the 20 percent production cut is held in place within the updated guidance — providing an opportunity to outperform should that higher-end demand return and lessen the risk of further disappointments,” Wold wrote.

“We believe core marine fundamentals, excluding large boats, remain intact and see Brunswick boat margins recovering in 2018,” agreed Wells Fargo Securities senior analyst Timothy Conder.

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