BC – Brunswick: Consumer Discretionary With Long-Term Value

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.