After delivering a total return of over 140% in the last five years, it may seem unlikely that Bombardier Recreational Products (DOOO 0.55%) would make for an excellent "buy on the dip" candidate. However, that appears to be the case for the Canadian powersports company.
As the Pepsi to Polaris's Coca-Cola in the powersports industry, Bombardier is home to the popular Ski-Doo and Sea-Doo brands its ticker gives a nod to -- among many more brands such as Can-Am, Lynx, and Alumacraft. Whereas Polaris is the top dog in off-road vehicles in the U.S. and the No. 2 player in snowmobiles, Bombardier is the leader in snowmobiles and No. 2 name in the off-road niche.
Thanks to these leadership positions, I've already discussed why Polaris is a promising buy at its current once-in-a-decade valuations. However, I think its slightly more snow-focused competitor also looks like a steal at today's prices as we head into 2024.
NASDAQ: DOOO
Key Data Points
Still growing its share of the powersports niche
Generating 60% of its sales from the U.S., 16% from Canada, and 24% from international markets, Bombardier sells products through four main categories:
- Powersports year-round (48% of sales): All-terrain vehicles (ATVs), side-by-side vehicles (SSVs), and three-wheeled vehicles (3WVs) sold under the Can-Am brand.
- Powersports seasonal (34%): Ski-Doo and Lynx snowmobiles and Sea-Doo personal watercraft (PWC) and pontoons.
- Marine (5%): Alumacraft, Quintrex, Manitou, Stacer, and Yellowfin boats.
- Parts, accessories, and apparel (PA&A) (13%): Rotax engines for carts, personal aircraft, and boats and powersports equipment, accessories, and apparel.
Leading the charge for Bombardier is its No. 1 market share position in the snowmobile and PWC (or jet ski) niches. The Sea-Doo brand is synonymous with the jet ski industry, much like Kleenex is to tissues, which might make it no surprise that it owns around a 65% share of the market in North America. Meanwhile, its seasonal-opposite snowmobile unit also maintains a leadership position in its market, growing its share by 12 percentage points over just the past year.
On the year-round powersports front, Bombardier is first in 3WVs, second in SSVs, and third in ATVs across North America, only trailing Polaris overall in these lines. Despite only being the No. 2 manufacturer in SSVs, the company believes it has a 30% share of that market in North America -- a figure that has grown from just 12% in 2021, demonstrating incredible momentum in that area.
Cumulatively, across its core verticals -- ATVs, SSVs, 3WVs, snowmobiles, and PWCs -- Bombardier has seen its share of the market grow from 20% in 2017 to 37% today, positioning itself alongside Polaris as the co-leader of the powersports industry.
Best-in-class profitability and incredible returns
However, this leadership position means nothing if it doesn't lead to profits and free cash flow (FCF). With a return on invested capital (ROIC) of 28% and an expected $1 billion in FCF in 2023, Bombardier is also a leader on the profitability side of things.
DOOO Return on Invested Capital data by YCharts.
Measuring a company's profitability compared to its debt and equity, higher ROICs have proven to be an outperforming proposition for investors, as this article explains. With Bombardier's ROIC better than that of 90% of companies on the S&P 500, it is clear that its business is excellent at generating outsized profitability despite its industry's cyclical nature.
And the bow on top for investors? Bombardier's management loves to return this excess profit and FCF to shareholders through stock buybacks and, more recently, dividends. Since the company went public in 2013, it has lowered its total share outstanding by a staggering 36%.
DOOO Shares Outstanding data by YCharts.
On top of that, after cutting its dividend payments amid the pandemic, Bombardier has begun increasing its dividends again. Now paying a 0.6% dividend yield that only uses a microscopic 6% of its net income, the company could 10x its dividend payments to 6% and still have excess net income left over.
A valuation at a rare discount
Despite Bombardier's market-leading position in powersports, top-tier profitability, and dividend growth potential paired with a history of generous share repurchases, its shares trade at just 8 times earnings and 10 times FCF. This leaves the company trading with earnings and FCF yields that are the highest they have been in the last decade -- outside of 2020.
DOOO Free Cash Flow Yield data by YCharts.
While Bombardier's true valuation lies somewhere between these 10% and 13% yields due to the fluctuations it sees in its working capital, its stock remains deeply discounted to its own historical averages and the market as a whole. Although things may continue to be fairly rough for Bombardier over the next few quarters if consumers continue to rein in spending amid higher inflation, the restart of student loan payments, and high interest rates, investors should not ignore this stock.
Brighter days will be coming -- both for consumers and Bombardier's business. When those days will be here, nobody knows. But I'm beyond happy to start buying this market leader at a deeply discounted price before we move on into 2024.
