Strategic Inventory And Diverse Revenue Streams Set To Propel Future Growth

Key Takeaways

• Brunswick's strategic inventory management and focus on maintaining a fresh portfolio with current models are poised to positively impact future revenue.
  
• The company's diverse revenue base, including its recurring revenue businesses, and active approach to returning value to shareholders through share repurchases, support steady earnings and EPS growth.
  
• Rising interest rates and cautious ordering patterns are squeezing profits and challenging sales growth at Brunswick.

Catalysts

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

• Brunswick's ongoing and concentrated efforts to stimulate demand and clear aged field inventory have led to a very fresh remaining field inventory. This strategic inventory management, with approximately 85% of units being current models, is poised to positively impact future revenue as market conditions improve, potentially leading to an increase in sales volume.
  
• The company has demonstrated resilience with its recurring revenue businesses, such as the engine parts and accessories (P&A) business, Propulsion’s repower business, Freedom Boat Club, and Navico Group's aftermarket sales, contributing more than 50% of Q2 adjusted operating earnings. This diverse revenue base is likely to support steady earnings and provide cash flow stability, even in fluctuating market conditions.
  
• Brunswick's strategy of deploying strong cash flow towards substantial share repurchases, with $170 million deployed year-to-date, signifies an active approach to returning value to shareholders. This could bode well for EPS growth as the market stabilizes and begins to rebound.
  
• The company continues to capture market share in critical categories, particularly in outboard engines, where it now holds more than 48% of the U.S. market. This growing market share, especially in high-margin products and categories, is expected to support future revenue growth and profitability.
  
• Investments in new products and technologies across all business lines, coupled with a focus on maintaining the freshest portfolio, position Brunswick well for market share gains as the market returns to growth. The introduction of products like the Flite e-foil and the expansion of the Freedom Boat Club are examples of initiatives likely to drive future revenue and margin expansion.

Assumptions

• Analysts are assuming Brunswick's revenue will grow by 1.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.2% today to 9.3% in 3 years time.
• Analysts expect earnings to reach $565.5 million (and earnings per share of $8.54) by about October 2027, up from $358.1 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $379.1 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.9x on those 2027 earnings, down from 14.6x today. This future PE is lower than the current PE for the US Leisure industry at 19.1x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.64%, as per the Simply Wall St company report.

Risks

• High interest rates are continuing to pressure consumer budgets and suppress discretionary spending, leading to slower boat purchases and potentially impacting Brunswick's revenue and net margins.
  
• Increased levels of discounting and carrying costs due to slower retail sales are squeezing dealer and channel partner profit margins, which could negatively affect Brunswick's earnings.
  
• The expectation of full-year unit retail sales being down approximately 10% suggests a decrease in demand, which may lead to lower revenue and profit for Brunswick.
  
• The soft U.S. retail marine market, exacerbated by the high interest rate environment, poses a risk to Brunswick's sales growth and earnings as it impacts consumer purchasing behavior.
  
• The ongoing cautious ordering patterns by OEMs and channel partners, in response to the weaker retail environment, indicate potential challenges in maintaining production levels and could lead to lower sales and operational inefficiencies, impacting Brunswick's margins and earnings.

Valuation

• The analysts have a consensus price target of $88.6 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 $101.0, and the most bearish reporting a price target of just $70.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $6.1 billion, earnings will come to $565.5 million, and it would be trading on a PE ratio of 12.9x, assuming you use a discount rate of 7.6%.
• Given the current share price of $78.82, the analyst's price target of $88.6 is 11.0% 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.