Higher margins ahead for Brunswick?

ST. LOUIS – Among Brunswick Corp.’s managers’ expectations for the future are about $45 million in annualized cost savings from overseas engine plants and a substantial increase in boat and engine margins, according to a recent statement from A.D. Edwards & Sons analyst Tim Conder.

Conder, who participated in a recent institutional marketing trip with Brunswick management, said it’s anticipated that the cost savings – to be achieved by the first quarter of 2007 – will come from Brunswick’s newly opened Chinese engine manufacturing plant ($35 million) and its expanded joint venture engine facility in Japan ($10 million).

In addition, Brunswick expects to see its engine and boat segment operating margins rise several percentage points over the next three to four years, reported Conder. Engine operating margins, which were 9.9 percent in 2005, are forecasted to hit 12 to 13 percent, while Brunswick predicted that boat segment operating margins, which were 6.9 percent in 2005, will also rise to 12 to 13 percent.

“We would note that this outlook is comprised of 1) higher volumes, 2) $100-$200 million of cost savings from incorporating a strategic bill of materials in the boat segment,” explained Conder. “This outlook does not factor in 1) any potential additional changes in BC’s manufacturing footprint, 2) OEM closed mold boat hull manufacturing volume for third party customers, or 3) an economic recession.”

One step forward, one step back

The analyst also noted that Brunswick gained share in 2005 in the fiberglass boat market – due primarily to the popularity of the company’s Bayliner brand, while it lost share in the aluminum boat market. Aluminum boat unit sales dropped 7 percent nationwide during the year, while Brunswick’s volume dropped 15 percent.

“We believe this was primarily due to 1) BC’s greater concentration in the upper Midwest (MN, WI, and MI) which was negatively impacted by economic conditions and weather, 2) BC purposefully reducing channel inventories without negatively impacting dealer margins,” commented the analyst.

Peak ahead for Brunswick?

Conder also shared his view of where Brunswick stands in its earnings cycle. He believes that, “barring an unforeseen shock to the economy and/or consumer attitudes,” Brunswick hit its trough in 2001 and will peak in 2007 or 2008.

“We would strongly suggest investors take a cyclical approach when considering BC shares and the quality, positively skewed risk/reward opportunity that they offer,” he said.

However, the analyst also suggested that as Brunswick pursues its strategy to increase its market share in overseas marine markets and produce more technology based products, parts and accessories, its sales base is becoming less cyclical, which “should marginally mitigate BC’s exposure to the U.S. economic cycle going forward,” Conder commented.

For those reasons and more, A.G. Edwards is reaffirming its Buy rating and a $55 12- to 18-month stock price objective (the stock price stands at about $39.37 today).

“Although our near-term enthusiasm is modestly more tempered until April visibility unfolds, we continue to believe BC shares have limited downside risk and attractive upside potential,” Conder said.

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