Very few companies encapsulated what an unusual year 2020 was for investors more than boat and marine engine company Brunswick (BC 0.74%). In the middle of a recession, the company is reporting surging marine retail demand, and there's reason to believe Brunswick will continue growing for many years to come. Throw in a compelling valuation, and there's a strong case for the stock to have a great year in 2021 as well. Here's the lowdown.
Introducing Brunswick
I've been careful to avoid labeling Brunswick as a boat company, because it makes far more from its propulsion and parts-and-accessories segments. The real driver of Brunswick's sales and earnings, as seen in the first nine months of its fiscal year, is the higher-margin parts-and-accessories business, closely followed by propulsion, which largely consists of outboard engines.
|
Segment |
Net Sales |
YOY Change |
Operating Earnings |
YOY Change |
Operating Margin |
|---|---|---|---|---|---|
|
Propulsion |
$1.37 billion |
4.6% |
$203.1 million |
7.4% |
14.4% |
|
Parts and accessories |
$1.15 billion |
4.7% |
$226.2 million |
8.2% |
21.4% |
|
Boat |
$870 million |
(14.5%) |
$35.4 million |
(41.9%) |
7.3% |
|
Total |
$3.19 billion |
(0.1%) |
$402.8 million |
1.6% |
13.8% |
Data source: Brunswick presentations. YOY = year over year.
Don't worry too much about the sales decline in the first nine months or the weak-looking boat sales figures. In reality, Brunswick is experiencing a year in common with many other consumer discretionary companies with a weak first quarter, followed by a calamitous second quarter, and then a sharp recovery in the third quarter.
|
YOY Sales Growth |
Q3 2020 |
Q2 2020 |
Q1 2020 |
|---|---|---|---|
|
Propulsion |
32.7% |
(14.3%) |
(1%) |
|
Parts and accessories |
23.3% |
(5.7%) |
(4%) |
|
Boat |
18.3% |
(32%) |
(22%) |
|
Total |
26.3% |
(15.2%) |
(8%) |
Data source: Brunswick presentations. YOY = year over year.
Building momentum
Moreover, management expects the momentum built in the third quarter to carry on through the fourth as well -- revenue is expected to increase at a "low to mid-teens" percentage in the fourth quarter. As such, Wall Street analysts expect sales to grow at 3% for the full year 2020.
Turning to 2021, management is assuming that marine industry unit demand growth will be flat to up by low single digits, and based on that management estimates Brunswick's 2021 full-year sales will be $4.7 billion to $4.9 billion, the mid-point of which represents a 13.4% increase on 2020.
The positive sales trends are also dropping down into the bottom line with management expecting full-year 2020 adjusted diluted EPS of $4.75 per share and full-year adjusted diluted 2021 EPS in the range of $5.75-$6.25. Based on the current share price Brunswick trades on 15.6 times full-year 2020 estimates and 11.8 times to 12.8 times 2021 estimates.
Moreover, speaking on the company's third-quarter earnings call, CEO David Foulkes expressed confidence that Brunswick would hit its 2022 objectives laid out in February. For reference, management is aiming for EPS in the range of $6.25-$7.25 for 2022.
Clearly, the stock looks a good value, and there's reason to believe that Brunswick has very good prospects to meet those expectations.
Image source: Getty Images
Three reasons Brunswick can hit its targets
It's easy to dismiss Brunswick's sales surge in the third quarter as merely a temporary effect created by the COVID-19 pandemic encouraging a non-lasting shift in discretionary spending toward less public leisure activities. If you take this view, then you might have some concerns that its sales trends aren't sustainable.
However, digging into the details of the company's sales trends this year, there are three main reasons investors should have confidence in Brunswick's sales trajectory.
First, management pointed out that there was now 48% less inventory at dealers at the end of the third quarter of 2020 than at the same time in 2019. As such, if retail sales continue to grow, dealers will have to replenish inventory in big way in 2021.
Second, around half of Brunswick's post-pandemic boat buyers are coming from first-time or lapsed buyers. This is important because it implies a long-term stream of aftermarket sales to the new buyers and the potential to sell them upgraded outboard engines in the future. In addition, 73% of Brunswick's first-time buyers are in the 35-45 age group, compared with just 49% for repeat buyers. The new influx of younger buyers should drive sales for years to come provided their (buyers) interest in boating persists.
Image source: Getty Images.
Third, as a company, Brunswick has become a lot less cyclical over the years. The growth in parts and accessories and propulsion sales means the company is a lot less cyclically exposed to a downturn then it was in the previous peak in the industry in 2006, when boats made up 56% of revenue.
A stock to buy
Trading on an attractive valuation with sales and margin moving in the right direction, Brunswick should still have its best days ahead of it. The pandemic has opened up the company to sales from a new and younger demographic, and that looks likely to drive sales growth for years to come. Brunswick is a stock to consider for 2021.
