Brunswick: the industry’s low cost manufacturer?

ST. LOUIS – Wells Fargo Securities LLC’s Leisure Equity Research Department has upgraded Brunswick Corp. to an “outperform” rating and provided a $14.00-$16.00 valuation range for Brunswick shares, according to a recent statement from Senior Analyst Timothy Conder, CPA, and Joe Lachky, associate analyst.

“Brunswick is well positioned as the leading global low cost manufacturer of recreational marine products with a diverse geographic sales base,” commented Conder and Lachky in the statement. “Investors are yet to fully appreciate BC’s 1) mitigated risk of further production cuts, 2) lower operating cost structure for enhanced profitability at materially lower production levels, 3) position to gain share throughout marine cycles, and 4) potential peak cyclical EPS of ~ $1.70-$3.50.”

The analysts suggested that risks of further material production cuts appear to be largely behind Brunswick and other industry manufacturers such as Marine Products Corp. and Tracker. Production cuts and aggressive promotions over the past two years have resulted in reduced dealer inventory levels.

“Even if 2010 retail sales fall in the low double digits year over year, Brunswick will have to increase production by approximately 80 percent to hold channel inventories near historic lows,” the analysts explained, noting that third quarter boat inventories stand at 21 weeks, the lowest comparable period low since 2003.

They also pointed out that Brunswick’s new emerging cost structure should allow for improved profitability at materially lower production levels.

By the end of the year, Brunswick should produce $420 million of annual operating cost savings vs. ’07 levels), as well as an additional $25 million to $50 million of annualized operating savings from Mercury the end of 2011, the analysts suggested.

“Currently, these savings are being overshadowed by (1) negative overhead absorption from low production levels, and (2) restructuring charges,” they stated. “We now believe BC’s breakeven level of production equates to annualized industry retail sales of 145K-150K units and that the BC unit production equivalent to 200K units of industry sales will generate BC operating profits similar to when industry sales were at approximately 300K units.”

Finally, the analyst stated that Brunswick is well positioned to gain domestic and international market share as “the low cost producer with relative financial strength and international exposure,” which they said should help “mitigate the effects of what will likely be a very elongated U.S. consumer recovery.”

Brunswick’s position as the industry low cost manufacturer and its relatively strong financial condition should allow it to gain market share vs. weakened competitors and take advantage of growing international economies more quickly than its competitors, the analysts concluded.

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