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Analyst sees Brunswick leading a recovery

Leisure product stocks, including Brunswick Corp., "are beginning to anticipate a retail demand recovery," according to a report from analyst Edward Aaron of RBC Capital Markets.

"While too early to validate, this scenario still seems sensible from a risk-reward perspective. A little demand improvement would go a long way for these stocks," Aaron wrote. "The beginning of a recovery would provide further upside to estimates (which generally reflect flattish industry demand) and would be positive for valuations. ... While we have not yet seen evidence of a broad demand inflection, industry trends are moving in a positive direction."

The report included specific information on Brunswick, Polaris and Harley-Davidson.

"Our recent checks point to a stable, but still soft, demand environment during the seasonally slow Q4 and into January. However, we are encouraged by: rate-of-change improvement for most categories, low dealer inventory levels, normalized discounting activity and marginally improving credit availability," Aaron wrote.

"Harley and Brunswick have more upside potential in a broad demand recovery, but Q4 earnings might not be a catalyst following the recent strength in both stocks. We are not expecting 2011 estimates for Harley or Brunswick to be revised higher following Q4 earnings," he wrote. "For both stocks, we would look for pullbacks and/or evidence of improving retail trends to add to positions."

In discussing Brunswick specifically, Aaron said:

"We believe industry retail sales likely declined at a rate perhaps marginally better than the 14 percent experienced in Q3 and YTD. Relative strength within the boating market continues to be inversely related to price, which we attribute to several factors. First, discounting on larger fiberglass boats was far more pronounced in the year-ago quarter. Second, we believe the continuing migration of demand from new to used is more significant in higher-end boat categories. Third, smaller boats historically lead boat cycles, given their relative affordability.

"While boating is currently the weakest sector we track from a demand perspective, inventories have been worked down to levels that some industry contacts believe could present shortage problems during the upcoming selling season. Inventory aging has also improved considerably over the past few quarters and is now more in line with historical norms. Access to credit still isn't great, but seems to be getting somewhat better at both the wholesale and retail levels."

Looking ahead to next week's scheduled Brunswick earnings report, Aaron wrote, "We expect management to introduce a planning assumption of flat to slightly down industry retail sales in 2011."

Brunswick stock's 52-week high and low are $22.89 and $10. The stock closed Tuesday at $20.49 a share.



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