Refocusing On Powersports And Launching Can-Am Electric Motorcycles Will Boost Earnings And Margins

Key Takeaways

• Strategic refocus on Powersports and inventory reduction aligns BRP for improved financial performance and market position, boosting margins and growth potential.
  
• Emphasis on innovation and electric vehicle expansion aims to drive new revenue streams, market share gains, and enhance profitability.
  
• Selling the Marine business and challenges in powersports, retail decline, and supply chain risks may pressure BRP's margins and revenue growth.

Catalysts

Designs, develops, manufactures, distributes, and markets powersports vehicles and marine products in the United States, Canada, Europe, the Asia Pacific, Mexico, Austria, and internationally.

• The decision to sell BRP's Marine businesses and refocus efforts on Powersports is expected to improve the financial profile by increasing EBITDA margins and free cash flow, contributing to higher overall earnings.
  
• Reduction in network inventory, especially in off-road vehicles, positions BRP favorably to capture market opportunities and drive long-term profitable growth, potentially leading to increased revenue and improved net margins.
  
• The upcoming launch and ramp-up of production for the Can-Am electric motorcycle lineup is anticipated to open a new revenue stream and market segment, which could enhance revenue and earnings as the electric vehicle market expands.
  
• The focus on innovation, such as the new ATV platforms, and strong product lineups in off-road vehicles could lead to market share gains, contributing to revenue growth and potentially better margins due to a more profitable product mix.
  
• Continuation of operational efficiencies and cost management initiatives, even as global economic conditions evolve, is likely to support margin improvements and earnings growth through controlled operating expenses and strategic pricing.

BRP Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming BRP's revenue will decrease by -1.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.5% today to 7.3% in 3 years time.
• Analysts expect earnings to reach CA$612.0 million (and earnings per share of CA$9.15) by about December 2027, up from CA$222.6 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as CA$405 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.9x on those 2027 earnings, down from 24.8x today. This future PE is lower than the current PE for the CA Leisure industry at 16.2x.
• Analysts expect the number of shares outstanding to decline by 2.89% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.38%, as per the Simply Wall St company report.

BRP Future Earnings Per Share Growth

Risks

• The decision to sell the Marine business indicates potential challenges or decreasing profitability within that segment, which could impact overall revenue and net margins negatively, as the core Powersports business may not fully compensate for the lost revenue.
  
• The powersports market is experiencing soft industry trends and high levels of promotional activity, which suggest the possibility of sacrificing profitability in favor of maintaining sales volume. This could pressure net margins as increased competition forces BRP to match promotions.
  
• BRP's North American powersports retail was down 11%, with significant variability by region (EMEA retail down 19%), possibly impacting future revenue growth and market share. Lingering inventory challenges may continue to weigh on revenue if these declines persist.
  
• Supply chain and operational risks related to the timely reduction of network inventory could lead to shortages or delays, directly affecting product availability and thus revenue generation in critical sales seasons.
  
• The transition to electric vehicles (Can-Am electric motorcycles) involves initial ramp-up and investment risks, potentially leading to margin pressure or increased expenses without guaranteed market acceptance, impacting earnings and net margins.

Valuation

• The analysts have a consensus price target of CA$88.78 for BRP based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$103.0, and the most bearish reporting a price target of just CA$78.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be CA$8.4 billion, earnings will come to CA$612.0 million, and it would be trading on a PE ratio of 11.9x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of CA$75.63, the analyst's price target of CA$88.78 is 14.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.