DENVER — RBC Capital Markets Corp. analyst Edward Aaron said in a recent investment note that he recommends owning Brunswick stock in anticipation of a retail sales recovery.
Following Brunswick’s recent earnings report, Aaron noted, “Similar to our observations from Harley’s release earlier in the week, we came away sensing increased optimism by [Brunswick] management that retail conditions are beginning to improve from very depressed levels. While clearly too early to make a definitive call on 2011 retail, we think risk/reward on the recovery story is favorable. As we see it, BC shares have more upside if the market turns in 2011 than downside if it doesn’t. Meanwhile, the market seems more likely to grow than shrink from here.”
While fourth quarter results were a bit worse than Aaron expected on margins, he noted that commentary on the retail outlook was more positive than expected.
“While not yet calling for a recovery, management did finally ‘call the bottom’ in the cycle,” Aaron wrote, “citing a positive initial read on boat show season, an improving macro backdrop, absorption of used boat supply and a healthier distribution network.”
Aaron said he was more confident of a recovery for small boats than for larger models.
“The larger boat category is the wild card. We find it easier to conceptualize a turn in smaller boats, where trends have been relatively stable and moving in the right direction,” Aaron wrote. “The timing of a turn in the larger boat segment is less clear to us given continued retail sales pressure in that segment. A turn in this segment, while perhaps a low probability for 2011, would be a significant catalyst, as it would address structural concerns surrounding the boating industry and provide considerable earnings momentum.”