Author: Wolf Report

Author’s Notice: This article was published on iREIT on Alpha in late April 2023.

Dear subscribers,

So, over the past few years, I’ve become more and more active in certain sports areas. I’ve started skiing, I’ve begun golfing, and in my travels to southern Europe, I’ve been “engaging” in more and more boating. Naturally, whenever I get into something new, I look at what people are using. What brands can be found, what are the things people like, and what “works”? I then try to find out if any of those companies are publicly traded and investable. It was how I got into Thor industries, to begin with – some of their brands became familiar to me as I was RV’ing around Sweden for some time.

In this article, I’m going to be familiarizing you with a company aimed at the maritime sector. Brunswick became more interesting to me when I came into contact with some of the company’s brands in Greece during a vacation.

So, let me show you why I think Brunswick is a good company, and why I’ve recently started putting my money where my mouth is.

Brunswick – Basic facts

Some basic facts to begin with. Brunswick Corp (NYSE:BC) is a leisure company and one that gets compared to industry, parts, and other leisure companies. It has the ability to generate upwards of $7B worth of annual revenues, upon which it makes a pre-tax profit of around a billion dollars.

Brunswick is BBB-rated, so it’s not the best, but it’s “good” enough, with a debt/cap of around 53%. It pays a dividend, even if that dividend is meager both in and outside of the sector, currently at around 1.86%. Long-term investors in Brunswick have, generally speaking, done pretty well for themselves. At an 8.5% performance on an annual basis for the past 20 years, you’ve outdone the market, and that is with a very serious EPS crash back in the GFC in -08. This company did not go positively into the recession, and it took until 2011 that EPS was positive again.

Brunswick was formerly known as the Brunswick-Balke-Collender Company. It has been manufacturing products for over 160 years, and now operates in over 28 countries, employing 18,000+ people.

The company’s main segments, or how it makes money, is actually split into some very attractive areas and at good percentages. It’s about a third in parts and accessories, a third in boats, with similar percentages in propulsion, with some inter-segment eliminations. The company manages a 26.8% GM, 14.3% operating margins, and a 12.5% EBIT Margin.

Even at the net income level, the company manages nearly double digits. That puts it above most vehicle/boating companies, and on par with certain luxury companies, which is quite excellent.

At its heart, the company is a profitable business. It owns attractive brands, including but not limited to Sea Ray, Boston Whaler, Bayliner, Mercury Marine, Attwood, Lund, Crestliner, Mastervolt, MotorGuide, Harris Pontoons, Freedom Boat Club, Princecraft, Heyday, Lowe, Uttern, Quicksilver, CZone. The company even has a Swedish business in Uttern, a manufacturer of cruisers, bowriders, center consoles, and weekender model boats (or “cabin cruisers”, as they’re called), one of which I actually had the pleasure of being on last year and enjoying the Swedish sun – what little there usually is of it. The company’s products are well-built, well-loved, and among the best in class.

The company may best be called a leader in maritime recreation, and at the time of writing this article, manages over 60 industry-leading maritime brands, in the segments seen above.

Now, despite its global appeal, the company is primarily a US-based business in terms of sales. Over 55% of the company’s sales go to NA. However, the company still has a massive market to address. I did not know this before diving into this segment, but over 200,000+ new boats are sold every year, and there are a total of 10M registered recreational boats. The demographics and the market that Brunswick addresses with its products is very attractive. The products, even the ones that I would personally buy, are priced at a level where it is neither hard nor tricky to afford or finance one – and if you live close to the coast, it might be something you’re actually considering. That’s not even mentioning the leadership the company has in propulsion, which moves into fishing boats and engine brands – there are over 55,000,000+ fishermen and anglers worldwide.

This is not the same company that failed to make a profit for 2-3 years in the GFC. Brunswick has also been on an acquisition spree that has transformed the business potential in terms of what earnings we might see going forward.

The mix and earnings is extremely attractive in this business.

Granted, there is a decent amount of cyclicality to how things go for the company here – and that’s not going away. We’ll look at what the company has seen for the past few years when we go into valuation. However, regardless of that, this is no longer/not just a luxury business – not with 39% propulsion and 35% P&A. The company’s mix has evolved, to where i believe the current valuation is vastly underestimating what this company should be worth.

For 2025, the company is targeting over $10B in revenues. How? Will they focus more on Boats? No – the P&A business is targeted to grow by more than 7% in terms of the mix, taking share from the propulsion mix, to where almost half the company’s earnings will be coming from parts and accessories alone. This is also expected to improve company margins up to 17%+.

Brunswick has taken on plenty of debt to finance all of this growth. Looking at the 10-year debt bridge, it becomes clear why the market may be a bit leery looking at this company, and where to put it in terms of valuation. Because we have not seen the improvements in pure cash here – at least not yet.

Remember, debt and leverage aren’t a problem if you can handle it. And in my opinion, the company’s OCF and improvements in cash flow and net have risen on par with debt. There is no disguising that debt servicing and interest coverage is some of the main concern here. With a 9.92x interest coverage and a debt/equity of 1.29x, the company is in a meager position next to its sector rivals and peers. But when it comes to profitability, which will deliver the company’s ability to handle this debt load, I’m less concerned.

Brunswick is in the top 85-95th percentile in all relevant profitability metrics. It has an excellent track record of showcasing strong margins even in hard times, except for the GFC. The revenue growth rate, while impacted by M&A, is superb. Shareholders won’t be rewarded with massive dividends anytime soon, but this company is a grower, not a shower. By that, I also mean what the company is expected to do in terms of overall growth.

Also, for a leisure product and industrial company like this, Brunswick has maintained impressive ROIC in relation to its cost of capital. Even with the debt as it is ROIC – WACC comes to a 7.5% positive return – and that is good. Furthermore, Brunswick has been taking advantage of the weakness in share price to really double down on its buybacks.

Institutional investors aren’t “loading up” on BC yet – though there are plenty of them buying small amounts of shares. if you like me took advantage and bought in early April, you’ll have already seen some RoR here. But this was only a starter position.

Now I’m getting more serious about the business – and here is why.

Brunswick Valuation – It’s good

Now, the upside is good. There is no doubt about that. Looking at Brunswick as an investment, it’s trading at less than 8.6x P/E, with an average 2025E growth rate of nearly 6% on an annual basis. Historically, it’s managed closer to 15.3x – that alone showcases an upside here, but it’s also come at the cost of debt, which means we should approach it more carefully.

However, the simple fact is that at $86/share, which is still above my $77/share original price, you have an upside of nearly double digits even to a 9x P/E for this company.

You can slice that however you want – it’s a good upside, and BC is, as I see it, worth way more than a measly 9x P/E. I won’t value it alongside LVMH (OTCPK:LVMUY) or similar companies, but I do at least think we should be able to get an 11-13x P/E from the company. This is not a hard company to forecast – but it is an easy company to underestimate. Just take a look at what happens if you look at accuracy ratios.

So, these estimates are numbers you can take to heart, or even expect better from. But we’ll stay conservative – 11-13x. That means that at 11x, we’re at around 15-17% annually, and at 13x, we’re all the way up to 22-23% annually, or close to triple digits in 3 years.

So, that’s my conservative and base case – and I believe this to be realistic. If you want to be bullish, you can even go into 14-15x P/E ranges, and you’ll get that triple-digit return.

Analysts agree with my estimate here. Comps include businesses like Polaris (PII), BRP (DOO), Malibu Boats, Johnson Outdoors (JOU), Mastercraft, and others. BC isn’t at massively lower multiples in terms of revenues, but in terms of earnings, it’s definitely cheap. Currently, 13 analysts are following the company average at around $104/share, that’s from a low of $92 and a high of $122. A surprisingly tight range if you as me, and from those, 12 of the analysts are at a “BUY” or “outperform” rating. That’s one of the highest convictions I have seen in a very long time.

I can only add my voice to what has become a choir here – Brunswick is cheap for what it offers. The risks are well-known, and there is cyclicality – but far less than before. I want to point out that for 12-13 years, Brunswick has done only one thing. Growing. Including estimates, the company averages an expected EPS growth rate of over 21% historical and future.

Despite being above their absolute lows, and even quite above the lows where I bought the shares, I would say that Brunswick is a company that, at this time, is severely underappreciated.

I’m buying – and I believe you should consider doing the same.

I’ve done a lot of prep work here, analyzing market trends and estimates to make sure that I’m not buying what is essentially a luxury play going into a more difficult market. But no, Brunswick has enough appeal to where its luxury segment isn’t a make-or-break sort of part of the business.

I believe that even without the appeal of its luxury sales, Brunswick is a “must-BUY” at this time.

For that reason, this is my thesis for Brunswick, and I’m initiating coverage with the following targets.

Thesis

• Brunswick is a global leader in maritime leisure, with an appealing mix of boats, P&A, and propulsion products, and services. It has a good set of fundamentals and a good plan for growth.
• The company isn’t as luxury-exposed as you might think, and I believe that due to a combination of appealing M&As and a strong enough strategy, Brunswick will be able to significantly outperform the average here.
• I rate BC a “BUY” here – and my introductory price target comes to $100/share.

Remember, I’m all about :

1. Buying undervalued – even if that undervaluation is slight, and not mind-numbingly massive – companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.

2. If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.

3. If the company doesn’t go into overvaluation, but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.

4. I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.

Here are my criteria and how the company fulfills them (italicized).

• This company is overall qualitative.
• This company is fundamentally safe/conservative & well-run.
• This company pays a well-covered dividend.
• This company is currently cheap.
• This company has a realistic upside based on earnings growth or multiple expansion/reversion.

This company fulfills every single one of my metrics – I’m therefore assigning it a “BUY” rating.

Author’s Note: This article was published on iREIT on Alpha back in late May of 2023.

Dear subscribers,

When last reviewing National Storage Affiliates (NYSE:NSA), I made a point of not, at the time, having massive exposure to the self-storage space. Since that time, I’ve allowed myself increased exposure based on attractive valuations. I’ve taken advantage of companies, including NSA, dropping as the pressure on the market has increased. I’m not talking about the self-storage market specifically, but all markets.

The tricky thing since that time has been deciding what to invest in. That I invest isn’t in question – there is so much quality on sale due to the fear/expectation of a looming recessionary period, that I’ve put money to work, even if I’ve combined this with a higher savings rate than I had during the depths of 2022 when I bought much that is still up significantly today.

Let’s look at why I am slowly buying more NSA, and why you could do the same.

National Storage Affiliates – there’s a lot to like in self-storage.

The self-storage space is both a consolidated and fragmented industry. You have absolute giants like Public Storage (PSA), which account for the bulk of my typical investments and also represent much of my exposure in the space. However, you also have smaller companies that while smaller, are perhaps more agile and represent better income potentials (with higher volatility and risk) than the bigger giants.

NSA’s facilities and capacities exist pretty much across the entire USA under a mix of wholly-owned and JV properties – 1,100 of them to be exact, amounting to 71.5M square feet of storage space. The lion’s share of that space is found in the west and east, with more in Texas and the states adjacent to Texas.

1Q23 dispelled any notion investors might have about fundamental trouble for this company. While net income and FFO declined, the company also reported an increase in same-store NOI, by some viewed as a more important metric. This was driven by an increase in same-store total revenues – but the issue that’s dragging NSA down, and what is causing the company to perhaps experience some increased share-related pressure, is an increase in same-store OPEX.

Still, NSA continued M&A’ing and buying new space, despite the macro. The company acquired 16 self-storage properties at about a $160M price tag during 1Q23 alone, 15 of which were one portfolio from one of the company’s PROs.

The company also took advantage of the low valuation, repurchasing over 1.6M shares on the open market, increasing its credit limits and borrowing capacities, and restructuring its debt some of which matured in 2023.

While NSA still does not have what I would consider to be an IG rating on par with some rating houses, it uses Kroll Bond Ratings, which give the company’s BBB+ stable. It’s not as good as S&P, Moody’s or Fitch, but it’s better than nothing – especially for a REIT.

It’s important to recall that 2022, especially some quarters, was record-setting and cannot be upheld in a slowing housing market and muted economy, which are putting pressure on self-storage demand levels. The company is ratcheting up rent levels as much as it can, but as of now, it’s not outpacing operating expenses, which for NSA is heavily tilted towards utilities and marketing.

However, don’t let it be said that this puts NSA in danger. The company recently announced a 10% increase in the dividend, and I would say that companies in deep trouble do not increase their dividends by double digits.

NSA continues to guide for an FFO on a per-share basis of up to $2.86, which would be above the FFO for 2022, with double-digit revenue growth and “only” a 4.8% increase in expenses, leading to a forecast of almost 15% NOI growth. These trends bear watching, of course, we’re only in the first quarter of the year behind us.

The foundation for what made the company an attractive investment is not only still present, it’s increased from the last time around. We’re starting to get an impact forecast accuracy for what the OpEx increases will end up in. The market is, as I mentioned, highly fragmented with 51,000 properties around the US. Even a market leader like PSA has only a part of that one. NSA is at around 2% currently as of March, and the top 100 operators which do not include public REITs or U-Haul, manage around 6,2000 of them.

The historical case for investing in qualitative self-storage players at a cheap price remains. Why?

Because they tend to outperform.

My own REIT investment mix is tilted towards Apartments, industrial, Office, and Self-storage. I won’t go much into Diversified or specialized, and I stay mostly out of lodging/hotel. By that chart alone we should invest more in Self-storage, but of course, the truth is a bit more complex than that.

However, it is a historical fact to say that even in the worst 5-year period, self-storage has been above 4.5% per year – and that’s not something lightly said in the environment we’re currently in. TSR since IPO is 285%, and the company now has an EV of closing in on $10B.

NSA is growing – and you can be part of that.

The company has an occupancy of close to 94%, which is some of the more attractive out there, and its geographical spread comes with diversification de-risking. The outlook for many of its markets is absolutely positive.

The company even has arguments on a customer/pricing basis, with NSA being one of the cheaper alternatives around based on an annual rate in relation to household income. The company picks areas where it knows that it can compete not only on offering but on price as well. PSA is actually one of the more expensive ones when looking at this metric.

Occupancy trends are slowly normalizing toward a pre-pandemic level, which seems to be around 90-91% for this segment. As I said when I wrote my last article, my personal view of this amount of storage availability is that the supply seems high – but I don’t represent NSA’s typical customer, and it’s very clear that the dynamics in the USA and other parts of the world are completely different to my own expectations.

The arguments for self-storage are strong, from things like reducing clutter, security, and business expansion, companies in the space don’t have a hard time finding arguments for their customers – and while $90 may be a not-inconsiderable sum for a personal customer, it’s, of course, different for a business/commercial customer – though prices, of course, differ as well.

The arguments for the self-storage market, and for National Storage Affiliates, are strong. And NSA, with the yield after a 4.5% decline since my last article, is now closing in on 6%. That makes the company the highest yielder in the self-storage space that we cover, and a fair company to consider if qualitative and cheap.

Let’s look at valuation.

National Storage Space Valuation – It remains attractive

The company’s historicals are somewhat distorted by a massive bout of overvaluation we saw after 2020 and going into the pandemic. At times, NSA traded at almost 30x P/FFO, which rivals PSA, and which I do not view as an acceptable or relevant investment level for this company.

However, that’s not where we are now.

The current relevant P/FFO multiple comes to no more than 13.35x, which is less than half what it was back during its highs. It also means that there were people who bought the company who are now likely down more than 50% – and this is why valuation is incredibly crucial.

While I will give NSA some leeway in terms of premium, because its premium isn’t just due to that time, it typically trades closer to 18-20x, I tend to want to look at the company, or other companies, from a more conservative valuation lens.

The fact is, you can forecast NSA at below a 15x P/FFO, and still come out on top with nearly 13% annually. Going into this sort of macro and recessionary environment, this is not bad. I also do not think it unlikely that NSA will manage 2-4% FFO growth for the next few years, which “locks” this forecast in somewhat.

However, this is what I would consider to be a bearish case. Due to the company’s significant historical premium, I would consider it somewhat odd for the company not to recover, though perhaps slowly. The upside to a more realistic P/FFO multiple, say 15-18x P/FFO goes up from 13% per year to up to 22% per year – and we’re still at below 20x P/FFO. So your upside here is realistic, and your downside is pretty well-protected, as I see it. These businesses are fairly unlikely to see drop-offs in earnings growth or non-payment. The services they provide are unlikely to simply be canceled, because customers are attached to, or need their various items in storage.

Therefore, the current levels are not only considered attractive by me, but by other analysts following the company as well. S&P Global averages come to around $38-$49, with an average of $44/share. Note that every target here is above the current share price, even the more bearish ones, and the comparative upside here expected is almost 16% to that average. This price also represents a substantial discount to the NAV, with a current 0.77x to NAV, compared to a more typical 1.1x or even higher.

Every indication is that NSA continues to show substantial discounts at this level. There isn’t much to be said as to a continued bearish or negative case here, with a further downside. It could happen – valuations can disconnect, during times, completely from their historical levels. I don’t see a reason for this, however. This doesn’t mean it won’t happen, but it means I consider it unlikely at this point.

We’re now down to levels again that we saw during late 2022 – which is where I bought the company last time. So, I’m buying more NSA at this price, and based on a coupled valuation, stability, and fundamental upside, I am considering this to be a “BUY” here.

For that reason, this is my current thesis on National Storage Affiliates.

Thesis

• NSA is the “smaller sibling” of market leaders like PSA. It operates in the same sector but has a better yield and more upside due to a more compressed overall valuation.
• NSA may be a higher risk/reward play than PSA and similar REITs, but it also would be unfair to characterize the company as a somehow “excessively risky” investment. Its portfolio and sector have outperformed for years, and I forecast the self-storage industry to make money for decades to come – there is little to suggest this is going away, even if it’s going down in growth.
• Based on this, I would call NSA a “BUY” with a PT of $50/share, but no more than that. I’m not changing my PT as of this article.

Remember, I’m all about :1. Buying undervalued – even if that undervaluation is slight, and not mind-numbingly massive – companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.

2. If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.

3. If the company doesn’t go into overvaluation, but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.

4. I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.

Here are my criteria and how the company fulfills them (italicized).

• This company is overall qualitative.
• This company is fundamentally safe/conservative & well-run.
• This company pays a well-covered dividend.
• This company is currently cheap.
• This company has a realistic upside based on earnings growth or multiple expansion/reversion.

I believe NSA fulfills every single investment criterion I hold, even without a CR, and that makes it a “BUY”. I’m buying more NSA here, and slowly expanding my self-storage exposure.