Expansion Of Freedom Boat Club Will Provide Future Recurring Revenue

Key Takeaways

• Brunswick's capital strategy and working capital management are driving free cash flow and positive earnings impact.
  
• Expansion of Freedom Boat Club and innovation across segments support revenue and earnings growth.
  
• Currency fluctuations, tariff risks, and challenges in the marine market impact profitability and revenue growth despite efficiency improvements.

Catalysts

Designs, manufactures, and markets recreation products in the United States, Europe, the Asia-Pacific, Canada, and internationally.

• Brunswick's focus on cost containment, capital strategy execution, and working capital management is expected to drive significant free cash flow conversion, impacting earnings positively with a potential increase by approximately $1.25 per share.
  
• The company expects market share gains in the outboard engine sector, notably with Mercury Marine, providing a foundation for revenue growth and contributing to top-line improvements.
  
• Brunswick's aggressive expansion of Freedom Boat Club, including new locations in the U.S., Europe, Australia, and New Zealand, is anticipated to provide a recurring revenue stream, supporting revenue and earnings growth.
  
• New product launches and adoption of innovative technology across its segments, such as Navico Group’s products, are projected to enhance sales and operating margins, contributing to higher net sales and operating earnings.
  
• Brunswick is strategically positioning itself against tariff impacts and foreign exchange rate fluctuations through supply base migration and inventory staging, aiming to mitigate financial headwinds and stabilize net margins.

Brunswick Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Brunswick's revenue will grow by 4.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.9% today to 7.4% in 3 years time.
• Analysts expect earnings to reach $436.4 million (and earnings per share of $6.83) by about April 2028, up from $149.3 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $606 million in earnings, and the most bearish expecting $345 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.7x on those 2028 earnings, down from 18.5x today. This future PE is lower than the current PE for the US Leisure industry at 15.4x.
• Analysts expect the number of shares outstanding to decline by 2.56% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.6%, as per the Simply Wall St company report.

Brunswick Future Earnings Per Share Growth

Risks

• The uncertain tariff environment presents elevated risks, with an anticipated annualized impact of approximately $35 million in 2025, which can negatively affect net margins and profitability.
  
• There are ongoing challenges from foreign currency exchange rate fluctuations, expected to result in $30 million to $40 million unfavorable earnings impact due to the strong U.S. dollar, impacting international business revenue and earnings.
  
• Continued lower production and wholesale ordering, coupled with higher discounts, have decreased net sales, leading to lower operating earnings and potentially affecting overall revenue growth.
  
• The marine market remains challenging, with reduced U.S. retail marine market conditions. A flat U.S. boat retail market, with potential for worse performance, could constrain revenue growth and earnings.
  
• Despite certain efficiency improvements, elevated discounting and promotion levels, especially on prior model year products, could compress net margins if maintained over a longer period.

Valuation

• The analysts have a consensus price target of $74.018 for Brunswick 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 $90.0, and the most bearish reporting a price target of just $51.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $5.9 billion, earnings will come to $436.4 million, and it would be trading on a PE ratio of 12.7x, assuming you use a discount rate of 7.6%.
• Given the current share price of $41.93, the analyst price target of $74.02 is 43.4% 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.