LAKE FOREST, Ill. and CLEARWATER, Fla. – The recent earnings results of both boating industry giant Brunswick Corp. (NYSE: BC) and its No. 1 boat dealer customer, MarineMax Inc. (NYSE: HZO), suggest they are feeling the impact of a market slowdown. Recreational marine earnings were hit hard at both companies.
However, both companies said they expect to gain market share during these challenging market conditions and to be well positioned when the market rebounds. And investors and analysts seem to agree. Brunswick’s stock actually rallied as much as 10 percent at one point following its earnings release yesterday.
“We believe BC shares are suitable for investors with very long-term (i.e., three-year) time horizons. We're confident that the stock will move materially higher when the next cycle begins, and the odds certainly favor that happening within the next three years,” stated RBC Capital Markets analyst Ed Aaron.
Similarly, Merrill Lynch analyst Hakan Ipekci stated, of Brunswick, “While a lot of bad news appears to have been priced in the stock (07E net income implies an earnings decline of more than 50 percent since peaking in 2005), we believe a more sustainable rally will be possible when there are signs of stabilization in the retail market.”
“… we expect the company to continue to gain market share in the highly fragmented US marine market,” he added. “Furthermore, the company is likely to expand its international marine presence especially in the high-end boat market in Europe.”
Of MarineMax, Aaron wrote, “We rate HZO shares Outperform given the company's favorable market position and reasonable valuation on depressed earnings.”
Despite that news, one analyst warned that we may not have seen the worse yet.
“We believe reaction reflects perception that ‘the bad news is out there,’ that numbers are now set to a trough level, and that the stock is no longer reacting negatively to bad news,” wrote Aaron. “Although we like the long-term story and believe the stock is below intrinsic value, we believe the underlying thesis behind the bullish reaction has risk. Just because management guided operating margins to 2001 trough levels does not mean that there's a hard stop at 2001 margins. Cycles can persist for extended periods of time, and because the peak of industry demand in the 2003-2005 cycle was lower than the prior one, it is entirely possible that this cycle trough could be lower than the last one.”
Another analyst seemed to disagree, however, suggesting that the stock has indeed bottomed out.
“Based on a historical trough multiple near 18.5X and trough EPS of $1.50-$1.80, it appears that BC shares have seen THE bottom. Investors must now await evidence of a stabilizing U.S. marine retail environment as the next material upward catalyst,” commented Tim Conder, an analyst at A.G. Edwards & Sons.
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