BC - Brunswick Corp.: Record Performance Means Shares Remain Significantly Undervalued

Summary

• Brunswick Corporation delivered record financial performance in fiscal year 2022.
• Despite a weakening economy there are indicators pointing to demand remaining healthy, and Brunswick Corporation is guiding to a strong fiscal year 2023.
• Despite the recent rally in the shares, we continue to believe they are trading at a very attractive valuation with a single-digit forward p/e ratio.

In our previous articles on Brunswick Corporation ( BC ), we had been arguing that shares were trading at a very attractive valuation. There was some fear that after a Covid sales boost, demand would decline significantly. This was despite the company repeatedly assuring investors that demand remained healthy and providing strong guidance.

The most recent Q4 earnings results show that the company was right, as Brunswick Corporation once again reported record numbers. Shares have significantly rallied, outperforming the S&P 500 index (SP500) by a factor of ~3x since our last article. Despite the strong rally we believe there is still a lot of value in the shares at current prices.

Earnings Results

The company delivered record revenue of $6.8 billion in net sales in 2022, and ~$1.05 billion in adjusted operating earnings. This translates to ~$10.03 in adjusted earnings per share, up ~21% when compared to 2021.

In the fourth quarter, all regions grew sales versus the fourth quarter of 2021. U.S. sales increased thirteen percent and international sales increased twelve percent versus the prior year quarter. For the full year, sales increased twelve percent compared to 2021 on a constant currency basis and excluding acquisitions, led by gains in the propulsion and boat segments.

During the Q4 earnings call , the company reported that some headwinds continue, but they are moderating. For example, supply chain disruptions remain a challenge but have been improving, input cost inflation remains high but is starting to moderate, and interest rate increases are affecting buyers in the value segments. Still, most of the company's indicators point to demand remaining relatively healthy.

Demand Indicators

Brunswick Corporation shared some indicators that reassure us that demand indeed remains healthy. For example, boat registrations remain steady and retail boat sales have increased at a low to mid single-digit CAGR since the end of the Great Financial Crisis. Industry sales of approximately 170,000 units are below the estimated replacement rate. With a fairly constant 10 million boats in the U.S. boat park, and assuming a typical boat useful life of 30 to 35 years, replacement rates would suggest sales potential close to 300,000 units.

In other words, there is ample room for boat sales to further increase. Brunswick also shared that early season boat shows have been encouraging, with many shows sold out and attendance above prior year levels. Inventories generally increased in 2022 compared to 2021, but remain at healthy levels and below 2019. U.S. unit inventory remains 28 percent, or almost 5,000 units below 2019 levels.

Financials

When compared to the previous year, Q4 net sales were up 10.6%, with adjusted operating margins of 12.8%, up 190 basis points. Operating earnings on an adjusted basis increased by 29% and adjusted diluted EPS of $1.99 increased by 38%. On a full?year basis, Brunswick delivered record results, including net sales of over $6.8 billion and adjusted diluted EPS of $10.03. It also increased adjusted operating margins vs 2021.

Given the strength of these results, we are surprised shares continue to trade at a single-digit p/e ratio. It would seem investors are worried earnings will regress to 2019 levels. While a deep recession could certainly have a big impact on earnings, company guidance is for earnings per share to remain close to the $10 level, and might even increase in 2023 compared to 2022.

Brunswick Corporation ended the year with over $600 million in cash and marketable securities, despite spending ~$450 million in share repurchases in 2022. This allowed the company to retire ~8% of shares outstanding. Brunswick's investment grade credit rating remains strong, with a healthy balance sheet and low leverage.

Guidance

Brunswick Corporation is guiding net sales to be between $6.8 and $7.2 billion in 2023, and adjusted operating margin to be approximately 15 percent. Adjusted diluted EPS is expected in the range of $9.50 to $11.00, and the company is planning to generate more cash in 2023, with anticipated free cash flow generation to be in excess of $375 million. It looks like the first quarter is expected to be a little bit weaker that the rest of the year. Overall, we find this guidance to be reassuring given the weakening economy and the fact that Brunswick Corporation's products remain discretionary purchases.

Brunswick Corporation also shared that they are planning on retiring $80 million of long?term debt coming due in 2023, and are budgeting for ~$150 million of share repurchases in 2023.

Valuation

Brunswick Corporation is currently trading with a market cap of ~$6.5 billion. Based on the estimated ~$7 billion in sales for 2023, the company is trading with a forward p/s ratio of ~0.92x. We believe this is too cheap for a company that is delivering ~15% operating margins. At the mid-point of guidance, the forward price/earnings ratio is only ~8.8x. Analysts also expect the company to continue growing earnings the next couple of years. The company is even more optimistic, having previously shared that they believe they could potentially reach ~$17 earnings per share by 2025.

Despite the recent rally, shares continue to trade considerably below their historical valuation multiples as measured by the EV/EBITDA ratio. It would appear that investors believe current earnings are not sustainable, despite the company and analysts guiding to higher earnings in the future. We believe the valuation remains very attractive.

The company certainly appears to believe shares are under valued, as they continue being very aggressive with the share buybacks. The net common payout yield, which combines the dividend yield and the buyback yield, is quite high despite the company paying a modest dividend which currently yields only ~1.6%.

Risks

We believe the biggest risk Brunswick Corporation faces is that its products are very discretionary. Postponing a boat purchase is an easy decision if economic conditions get tough. As a result the company can be disproportionately impacted by a recession, and many indicators are pointing to a strong probability of a recession arriving soon.

Conclusion

Brunswick Corporation delivered strong Q4 and full year 2022 results, and provided solid guidance for 2023. The company shared several data points that show demand remains healthy despite a weakening economy. There is a risk that a recession could arrive soon and significantly affect the company.

Still, we believe Brunswick Corporation shares remain attractively priced, despite the recent rally, trading at a single-digit forward price/earnings ratio. The company seems to agree, as it continues buying back shares at an aggressive pace. Based on the solid earnings results, we are maintaining our "Strong Buy" rating on Brunswick Corporation stock.

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