More boat sales declines forecasted

LAKE FOREST, Ill. – Stock analysts are predicting a continued decline in boat sales demand for the industry in 2008 following Brunswick Corp.’s earnings release earlier this week.

“Brunswick Corp. shares, along with other consumer durable stocks, have found a bid on optimism that monetary and fiscal stimulus will drive a recovery in 2H08,” wrote Ed Aaron of RBC Capital Markets in a recent report. “In a normal cycle, we would likely align ourselves with this view. However, nothing about this downturn has been ‘normal’ in the context of recent history, so we are taking a more cautious approach by waiting for signs of improvement in industry credit metrics and stabilizing demand.”

“Given our view that demand will weaken further in the 2008, we believe dealers will look to further de-stock inventory following the model year changeover,” he added. “As a result, we are not expecting to see the ‘wholesale bounce’ until early 2009 at the earliest. We expect that margin pressure from lower production will more than offset incremental savings from lower discounting and cost reductions.”

“Brunswick's better than expected top line results were more than offset by significant margin compression tied to the declining domestic boat business,” wrote Michael Savner, a Bank of America analyst. “While sales results are mildly encouraging (particularly marine engines), marine margins overall are likely to stay depressed as the company works to properly align production costs to declining retail demand. It is still too early to call 2008 the trough year, in our view, and would therefore wait before applying previous cycle trough multiple. We maintain our cautious view on BC shares and our $17 target.”

Savner pointed out that gross margin was down 180 bps, due to fixed cost absorption and higher promotions.

“The Boat segment reported negative operating margins largely driven by higher discounts in Sea Ray brand boats, which reduced the operating margins by 200 bps,” he added. “Revenue growth was led by fitness segment, P&A and international marine business, offset by domestic boat declines. International sales contributed 36 percent of total sales in 2007, up from 32 percent in 2006. In the fourth quarter international sales contributed 45 percent to engine sales and 24 percent of the boat sales.”

Savner also suggested inventory levels remain high. While sequentially factory inventory levels improved by $100.4M, they were still 5-percent higher than last year. Specifically, finished good inventory was up 9 percent and work in progress inventory was up 5 percent, offset by raw material inventory, which was down 5 percent. Fiberglass boat inventory was 34 weeks down from 35 weeks y-o-y, and aluminum boat inventory was 33 weeks up a week from a year ago. Engine pipeline inventory was 26 weeks up from 23 weeks last year.

“Brunswick expects restructuring and brand rationalization to continue in 2008,” he stated. “Management provided no guidance for 2008 given poor visibility on the domestic front. The company also pointed at the possibility of further impairment charges related to its outboard boats.”

“We are slightly tweaking our model and lowering our 2008 estimates,” Savner concluded. “We now estimate FY08 revenue of $5.55 billion and EPS of $1.07. For 1Q we expect revenue and EPS of $1,345.6 million and $0.13, respectively. We have adjusted our model to account for: (a) lower gross margins due to higher fixed cost absorption and higher promotions (b) increase in SG&A expense due to increased promotions and plant closures and (c) slightly improved revenue expectations. We model a 2.1-percent decline in 2008 sales driven by 1-percent engine sales decline, 5-percent decline in boat sales and offset by 7-percent growth in fitness and flat bowling and billiards.”

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