Market takes industry by surprise

LAKE FOREST, Ill. and CLEARWATER, Fla. – The weakness of the marine market so far this year has taken the industry by surprise, even boat retailer MarineMax Inc. and boat builder Brunswick Corp.

MarineMax Chairman, President and CEO Bill McGill cited “greater than anticipated pricing pressure” in his company’s earnings conference call, while Brunswick Chairman Dusty McCoy called market conditions “surprisingly difficult.”

When analysts asked the executives what was ahead for the industry, they seemed unusually reluctant to provide forecasts.

“I really don’t know if this industry is at the bottom,” said McCoy.

“I’m not sure when the industry will begin to recover,” said McGill.

Analysts taken by surprise too

Given industry conditions, analysts have been very cautious about their stance on marine industry stocks. But they were in for some surprises of their own this quarter.

Tim Conder of A. G. Edwards & Sons reported that, in the case of Brunswick Corp., he was “pleasantly surprised by international marine sales offsetting the ongoing weakening of the U.S. boat market” and was “encouraged by the greater than anticipated benefit of the company’s marine international diversification.”

Ed Aaron of RBC Capital Markets also expressed some surprise. “We were clearly expecting something worse,” he wrote in a statement. “We couldn’t help but be surprised by the news, considering how weak the retail market was in Q1 relative to the low-to-mid single digit retail sales decline underlying the guidance provided last quarter.”

Aaron also responded to McCoy’s suggestion in Brunswick’s earnings conference call that “guidance can tolerate a high single-digit to mid-teens decline in marine production.”

“We were surprised and encouraged to learn that management’s range of guidance could absorb that much stress from the market,” he added. “Efforts to diversify and improve its marine operations are paying off.”

In addition to its international sales, growth in Brunswick’s parts and accessories business is offsetting boat sales declines. The same can be said of MarineMax. During its conference call, McGill said the company is pleased with the progress it’s making in growing this and other high margin sectors of its business, like F&I and service. He noted that the company is even displaying parts and accessories at boat shows.

Aaron commented that while MarineMax’s “inventories remain high relative to demand” they are “showing signs of improvement.” The analyst lowered his 2007 estimates but left 2008 estimates, price target and Sector Perform rating unchanged.

In the case of West Marine, it seems analysts were unpleasantly surprised. Aaron noted that losses were “far worse than we had forecast” and that while the company was encouraged by West Marine’s cost reductions, rationalization of inventory and improved merchandising, its ability to meet its guidance depends on improvement in market conditions, of which there is no sign at this point.

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