You've heard the old saying, "you get what you pay for." It's no different with stocks. Growth seekers pay a high multiple for greater potential earnings and it's not uncommon to see companies in growth sectors such as tech trading at lofty multiples.
Growth isn't the first word that comes to mind when you think of Brunswick
The reason is Brunswick is a cyclical stock. In an early recovery, cyclical stocks trade at high multiples because the market believes earnings have bottomed and the cycle is reversing. When the cycle reverses and earnings normalize, the multiple gravitates to a more reasonable level, as illustrated below.
|
Metric |
2011 |
2012 |
|---|---|---|
| recent price | $22.13 | $22.13 |
| consensus EPS estimate | $0.26 | $1.09 |
| multiple | 85.11 | 18.40 |
A potential hole in the boat
However, there is reason to believe this cyclical stock won't fully participate in the recovery, resulting in "normalized earnings" that don't look so normal.
The reason: This recovery will likely see rising oil prices, and rising oil prices could hurt sales. A boat is a luxury item; a luxury item that burns gas. Many consumers may find it difficult to justify purchasing an expensive discretionary item that burns expensive gasoline. Take a look at the relationship between Brunswick's sales and average gas prices in 2007 and 2008.
|
Brunswick |
Sales |
Gas Prices |
|---|---|---|
| 2007 | $5.7 billion | $2.84 |
| 2008 | $4.7 billion | $3.29 |
| % change | (17%) | 16% |
As gas prices increased, sales decreased. Coincidence? Maybe, but I don't think so. The problem for Brunswick is gas prices could potentially exceed 2008 levels. Just listen to the experts.
Former Royal Dutch Shell president Jon Hofmeister predicts more pain at the pump; $5 for a gallon by 2012. Similarly, renowned investor Jim Rogers believes oil is headed to $200 a barrel. Yikes! That's good for oil companies like Chevron
If history repeats itself, rising fuel prices could sink Brunswick's stock yet again.
Throw Brunswick back
Rising fuel prices coupled with plummeting equity make me think Brunswick will throw a gutter ball in 2011. A 2011 disappointment will probably lead to a downward adjustment of 2012 estimates, too. Let's speculate what Brunswick might trade at if earnings come in on the low end of current 2012 estimates using the historic S&P multiple of 16.40.
|
2012 |
Price |
|---|---|
| low-end EPS estimate |
$0.55 |
| multiple |
16.40 |
| projected stock price |
$9.02 |
Predicting a 60% correction might be extreme, but at the very least, I see choppy waters ahead. And with a Motley Fool CAPS rating of one star, I'm not alone.
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