Analyst upgrades Brunswick to “outperform”

Even if demand for new boats is slow to recover, Edward Aaron, analyst for RBC Capital Markets Corp., suggests that there is reason to be optimistic about Brunswick’s stock performance moving forward.

“With liquidity risks now behind it and dealer inventories coming in line,” he explained in a report released this morning, “we view [Brunswick] as a compelling three-year earnings recovery story. We believe the rate of improvement in profitability and inventory metrics beginning in 2010 will provide reason for optimism, even if demand is slow to recover.”

RBC’s report outlines, through a survey of nearly 150 dealers, that consumer confidence and the availability of financing are the leading concerns among marine dealers. In response to a question that asked dealers what they though were the biggest challenges they currently faced, nearly 75 percent of dealers said, “low consumer confidence,” and 60 percent of dealers noted “tighter lending standards.” After that, “competitor discounting” (40-plus percent) and “poor showroom traffic” (35-plus percent) followed as the largest challenges.

Download the full report here.

Despite these challenges, however, Aaron suggests that Brunswick’s production should be significantly higher in 2010-2011, even if demand does not improve.

“With flat demand, we estimate that Brunswick’s boat segment revenue will grow 65 percent and 35 percent, respectively, over the next two years,” he wrote in his report. “As production ramps back up, Brunswick should experience dramatic margin improvement in 2010. At the same time, we believe dealer inventory levels will fall to unprecedented low levels in 2010 (13 weeks by 3Q-10 by our math).”

In RBC’s survey, 35 percent of all dealers surveyed suggested their new boat inventory level was “about right,” and only about 6 percent suggested that it was way too high. Of the Brunswick dealers in the survey, 29 percent suggested that their inventory was “about right” and an equal number reported that their inventory was “low,” giving it a 2 on a scale of 1-5 with 1 being “way too low” and 5 being “way too high.” And only about 3 percent of the Brunswick dealers suggested their new boat inventory was “way too high,” whereas 7 percent of non-Brunswick dealers said their inventory was “way too high.”

“In 2009, we estimate that Brunswick will under-ship retail by nearly 50 percent,” Aaron added in his report. “By year-end, this should put dealer inventory at much healthier levels. Assuming flat retail demand and 1:1 inventory replenishment, Brunswick would need to roughly double production to meet demand.”

RBC Capital Markets balanced its view and report with the acknowledgement that a number of unique factors create an uncertainty about the future. They note an unusual level of recent discounting and a future that may cause Brunswick dealers to have further trouble competing with inventory liquidation by their competitors. “Moreover, if we are correct in our view that Brunswick’s pipeline inventory levels could fall as low as 13 weeks next year, we believe it is highly probable that the company will leave some sales on the table,” Aaron added.

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