Analysts weigh in on the recovery

The year 2010 will represent the low point in new unit sales as a percent of total unit sales for the industry and a recovery in new powerboat unit sales, estimated at 10 percent, should begin in 2011.

Those were among the conclusions of an interesting report issued today by Wells Fargo Securities in advance of Brunswick’s earnings report, which is to be released July 29. Senior Analyst Tim Conder, along with Associate Analysts Michael K. Walsh and Joe Lachky, discussed what they believe the results from Brunswick will be and also offered insight into how they think the industry as a whole will perform over the next months and years. Since we’ll know in a couple of weeks what Brunswick’s results actually are, let’s instead highlight some of the predictions the analysts offered concerning the industry at-large.

As mentioned above, the analysts believe 2010 will represent “the trough in new unit sales as a percent of total unit sales” given the need for Individuals to “liquidate” owned boats and, secondly, the abatement of repossessed recent model product.

“We do not believe new boats will quickly return to the mid/upper 20 percent of the total unit sales mix, however a return to the 20-22 percent range over the next 1-2 years appears very reasonable,” they wrote.

The clearance of aged “new” inventory and decreased availability of used product should precipitate an estimated 10 percent recovery in new powerboat unit sales beginning in 2011, they concluded.

Some other key points taken from the report:

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– Recovery in the domestic marine industry will be very gradual and elongated considering (1) the highly discretionary nature of boats, (2) unknown degree that “fire sale” industry clearance discounting in 2008-2010 will pull forward demand, (3) likelihood of slower than normal income growth/higher taxes, and (4) need to de-lever/rebuild wealth among the industry’s target demographics.

– U.S. retail new powerboat sales are tracking below expectations in the key months of May-July, but aged inventory is still expected to largely clear in ’10. Entering 2010, Brunswick, Marine Products and Tracker appeared to have the cleanest domestic channel inventories in the industry while most of the remainder of the industry still needed to clear aged “new” inventory via on-going discounts. BC and industry retail new unit sales were expected to be down approximately 10 percent with smaller boats (< 25’) selling the best and larger product lagging.

– We now estimate 2010 U.S. retail new powerboat unit sales (fiberglass and aluminum) will be down 17-20 percent. Sales of newer boats (including aged “new” inventory) appear to be lagging original estimates due to (1) On-going sluggish economic recovery, (2) Continued availability of used/repossessed product, (3) General tightness of retail credit especially for mid/lower tier credit scores, and (4) Uncertainty among Gulf Coast purchasers given the BP oil spill and forecast for a higher than average hurricane season.

– Looking at prospects for the cyclical recovery, we believe the answer to three key questions will determine the shape of the boating industry recovery:

(1) Given that the key 25’-40’ segment of fiberglass boats (the most profitable segment of the market) had the most aged inventory overhang in the industry, how much demand has been satisfied by the aggressive discounting to clear this product and will this limit the degree of normal cyclical recovery for this segment?

(2) What impact will expiring Bush tax cuts/Obamacare taxes will have on demand for 35'+ boats ($250K+ income customer)?

(3) Will Gen Y consumers (born 1977-1995) view boating as much of an attractive leisure/entertainment alternative as the baby boomers/Gen X or will they look to other options (e.g., music, experiential travel)?

Considering all of these factors, we believe a best-case scenario of peak cyclical industry new retail powerboat demand is now between 180-200K units in 2014/2015.

– While industry statistics on engine sales are more difficult to track, U.S. new engine unit growth is lagging that of new powerboats given that most industry participants are building limited new current boat inventory and purchasers of used boats are buying an already complete package. Internationally, new engine sales appear to be outpacing the U.S. at retail. As industry boat manufacturers clear aged “new” boat inventory, sales of new OEM engines should accelerate in ’11 with a ramp up in boat manufacturer production.

Read the complete Wells Fargo Report

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