Even in the absence of an "economic tailwind," a release of pent-up boat-replacement demand will make Brunswick Corp.’s earnings rapidly grow, as well as the company’s consolidation efforts since the recession's onset.
That’s according to an analysis by B. Riley & Co. LLC, which also says Mercury Marine is “underappreciated” because of a slow start in 2012 as “it struggled to ramp up production following a major facility consolidation” at the end of 2011.
“It also faced sharp mix headwinds domestically and sluggish European demand,” B. Riley analyst Jimmy Baker wrote, adding that about 14 percent of Mercury’s sales are in Europe. “We continue to believe these European headwinds are manageable.”
Additionally, demand for Mercury’s 150-hp FourStroke engines “dramatically exceeded expectations and its near-term capacity, forcing Mercury to leave some sales on the table, in our view,” which contributed to anemic growth in the second quarter, Baker wrote.
“We expect a pronounced reversal of this trend in the second half of 2012 as Mercury displays more robust growth — we estimate up 5.9 percent and 6.4 percent in the third and fourth quarters of 2012, respective,” Baker wrote. “Industrywide outboard demand continues to recover on a global basis with concentrated strength domestically, where Mercury has a disproportionate share.”
European weakness exacerbated lagging domestic sales for the boat group, Baker wrote.
“However, we believe the impact of weakening demand in Europe is vastly overestimated by certain analysts/investors,” Baker wrote. “Not unlike Mercury, we expect the boat group to post much-improved third and fourth quarters for 2012 after sluggish top-line results in the first quarter.”
Shares, targeted by B. Riley to reach $38, saw a 52-week high of $27.40 and a 52-week low of $13.19. Brunswick closed Monday at $25.02.