2023-10-03 17:32:12 ET
Summary
- The company's revenue increased by 13.9% YoY, while operating margin reached 13.6%.
- Despite macro uncertainty, the company's target consumer continues to be in strong financial shape.
- I believe that the company will continue to show strong results in the coming quarters, while the company's shares are priced at a relatively low price. My recommendation is buy.
Introduction
BRP ( DOOO ) shares have risen 2.2% YTD. Despite the fact that consumers continue to face pressure from macro headwinds, the company continues to demonstrate strong revenue growth and stable operating margins. In my article, I would like to analyze current financial trends and share my opinion on the future financial and operating performance of the business.
Investment Thesis
I believe there is an attractive point for investors to go long at the moment. In my personal opinion, the company will continue to demonstrate strong revenue growth despite macro uncertainty, as the company's target consumer is less sensitive to rising interest rates. Moreover, I expect operating margins to continue to be stable in the coming quarters. In addition, the company's shares are relatively inexpensively valued according to multiples.
Company Overview
BRP develops, designs, manufactures, and distributes powersports vehicles and marine products. The main revenue segments are Powersports (95% of revenue) and Marine (5% of revenue). The company operates in the markets of the USA (63% of revenue), Canada (16% of revenue), Europe (10% of revenue), Asia (6% of revenue) and Latin America (4% of revenue).
2Q 2024 (fiscal) Earnings Review
The company's revenue increased by 13.9% YoY . The largest contribution to revenue growth was made by the Powersports segment, where revenue increased by 15%, while in the marine segment sales decreased by 9% YoY. In terms of revenue geography, we see the greatest sales growth in Canada, where sales increased by 28% YoY, while in the US and Latin America revenue increased by 12% YoY and 37% YoY, respectively. Revenue in Europe decreased by 0.1% YoY.
Revenue by segment (%) and revenue by geography (%) (Company's information)
If we take a closer look at the powersports segment, which accounts for about 95% of total revenue, we see that the largest contribution to revenue growth was made by seasonal products and powersports PA&A and OEM Engines, where sales increased by 29.8% YoY and 14.3 % YoY, respectively, and sales of year-round products showed an increase of 7.6% YoY. You can see the details in the graph below.
Powersports revenue by segment (Company's information)
Gross profit margin increased from 24.7% in the 2nd quarter of 2023 (fiscal) to 25.1% in the 2nd quarter of 2024 (fiscal). Gross profit margin in the powersports segment increased from 25.3% to 26.5%, and in the marine segment decreased from 13.8% to -5%.
Gross profit margin & gross profit margin by segment (Company's information)
Operating expenses increased from 10.5% in the 2nd quarter of 2023 (fiscal) to 11.5% in the 2nd quarter of 2024 (fiscal) due to an increase in expenses for SGA and R&D from 4% to 4.2% and from 3.4 % to 3.7% respectively.
Op. expenses (% of revenue) and op. expenses by segment (% of revenue) (Company's information)
Thus, operating margin decreased from 14.2% in Q2 2023 (fiscal) to 13.6% in Q2 2024 (fiscal).
Operating income margin (Company's information)
In addition, the company published guidance for 2024 (fiscal). Thus, management expects revenue growth to be around 7%-10%, despite the fact that the company has lowered its forecasts for sales growth in the powersports and marine segment. You can see the details in the graph below.
My Expectations
I believe the company will continue to demonstrate strong operating and financial performance in the coming quarters. On the one hand, despite pressure from the macro headwind and a decline in consumer spending in the discretionary segment, the company is targeting consumers who are less sensitive to rising interest rates and increasing everyday expenses.
Bottom line, the typical BRP product buyer remains in very good shape financially. This puts us in a favorable position entering the second half of the year.
As I mentioned in my remarks, the household income of our customers has increased by 40% since pre-COVID, and those customers are shopping for high-end product, where we are good at.
In addition, despite the fact that the company's management has lowered its guidance on revenue growth rates in the marine and powersport PA&A and OEM Engines segments, I would like to note that these segments account for only about 15% of the company's total revenue, while core segments such as Year-Round Products and Seasonal products account for 53% and 32% of the company's total revenue, respectively.
Moreover, I think that profitability levels will continue to remain strong because: 1) the company is able to effectively pass on increased inflation to the end consumer 2) continued decline in the share of the marine segment, which generates a negative gross margin, could help improve consolidated profitability for the overall business.
Nevertheless, our results for the second half of the year are expected to be very strong from a historical perspective, reflecting the solid momentum of our power sports portfolio and the underlying strength of the demand for our products.
Risks
Margin: increased competition may result in the need to increase investment in pricing, which may have a negative impact on future operating margins.
FX: unfavorable changes in foreign exchange rates may result in lower revenues in dollar terms.
Macro (general risk): pressure on consumers from macro headwinds due to high inflation and declining real incomes may lead to a decrease in consumer spending in the discretionary segment, which may have a negative impact on revenue growth rates in the following periods.
Drivers
Revenue: the release of new models, reaching new price points, increasing sales volumes and the ability to pass on increased inflation to the end consumer can contribute to both an increase in revenue growth and an increase in market share.
Margin: an increase in the share of premium brands and a favorable model mix may support the level of operating profitability of the business in the following periods.
Valuation
Valuation Grade is C. In accordance with the P/E ((FWD)) and EV/EBITDA ((FWD)) multiples, the company is trading at 8x and 5.5x, which implies a discount to the sector median of about 43% and 41%, respectively. In addition, the company's shares, in accordance with the multiples, continue to trade at a high discount relative to the average value for the previous 5 years. Thus, in accordance with the EV/EBITDA ((FWD)) multiple, the discount is about 28% relative to the average multiple over the last 5 years. I believe the shares are not expensively priced while the company continues to demonstrate solid financial performance. In my personal opinion, the release of strong financial results for the next few quarters could be a catalyst for growth in the stock.
Conclusion
Thus, my recommendation is a buy. Based on the relatively low valuation multiples and the high discount to the previous 5-year average, I believe downside potential is limited, while strong financial reporting in the coming quarters could act as a catalyst/driver for the company's share price.
For further details see:
BRP: Strong Results Despite Macro Headwinds