A B. Riley & Co. analyst says that although stock at Brunswick Corp. is still undervalued, the company’s market opportunities for Mercury Marine are partially offset by challenges facing its boat group, particularly in the Sea Ray and Meridian brands.
Analysts met with Brunswick officials behind closed doors Thursday at the Miami International Boat Show and Strictly Sail, where Brunswick Boat Group president Andy Graves indicated that the company “may announce a new Sea Ray president in the next 30 days, who would likely be promoted from within,” B, Riley senior analyst Jimmy Baker said in a report.
“This individual will have big shoes to fill, in our view, as we found former president Rob Parmentier to have exceptionally strong dealer relationships,” Baker wrote.
As a result of the meeting, B. Riley slightly raised its 2013 earnings-per-share projection to better reflect Mercury margins, but lowered it again in 2014 to reflect “substantially weaker operating leverage from the Brunswick Boat Group, partially offset by better Mercury performance,” Baker wrote — ultimately reiterating a $40 price target for both years.
“Our biggest takeaway from Brunswick meetings is that management ... may concede margins at the Boat Group to maintain [or] grow share, given the benefits to Mercury justify this strategy,” Baker wrote.
“This may be the correct strategy, but it leaves a somewhat sour taste in our mouth as it implies either A, the boat market is not economically rational enough for [Brunswick] to gain share while generating a satisfactory return, or B, BC’s boat brands do not have product in place that facilitate market share growth without excessive discounting,” Baker wrote.
However, the impact on B. Riley’s model is relatively minimal. That’s in part because Mercury’s non-marine opportunities remain underpenetrated and underappreciated by investors, Baker wrote, and Mercury’s move to in-house sterndrive blocks may open the door to more non-marine opportunities.
In the Brunswick Boat Group, Baker sees “outsized product strength” from Boston Whaler and aluminum brands, while Sea Ray and Meridian “have room for improvement,” though Baker is confident of the company’s “healthy new roadmap” for product offerings.
“While Sea Ray and Meridian are perhaps slightly behind certain competitors from either a cosmetic or innovation standpoint, we note that some of its newest models, such as the 510 Sundancer, have been extremely well received, which gives us confidence” moving in future products, Baker wrote.
Brunswick said during its fourth-quarter earnings call with investors that it will under-ship retail demand in 2013, suggesting “this is specifically the case at Sea Ray,” which should lead to wholesale growth, Baker wrote.
Wells Fargo senior analyst Timothy Conder raised the valuation range following Thursday’s meeting from $37 to $39 to $40 to $42, according to a report.
“Brunswick Corp. is well-positioned to profitably gain share in a slow-growth environment” for three reasons, Conder wrote.
First, historically low marine industry inventories should produce year-over-year revenue growth. Second, a new operating cost structure provides “enhanced profitability at materially lower production levels” because of the advantages of manufacturing globally, and three, the company has the “strongest industry dealer network with diverse global sales,” Conder wrote.
— Reagan Haynes