2023-08-16 05:33:31 ET
Summary
- Brunswick Corporation manufactures boats and boat-related products and has experienced impressive growth in 2021 and 2022 related to an acquisition and a pandemic boost.
- The company operates under four segments, with the propulsion segment being the largest contributor to revenue.
- Short-term headwinds in customer sentiment don't concern me too much, as the company has a good history of increasing operating margins.
- With my DCF model estimates approximating a fair value near the stock's current price, I have a hold rating for BC stock.
Brunswick Corporation ( BC ) manufactures products around boats - the company's segments are parts & accessories, Navico Group, boats, and propulsion. The company has had impressive growth in 2021 and 2022, but as economic worries are on the rise and as the company seems to be valued with reasonable earnings expectations, I have a hold-rating for the stock.
The Company
Brunswick operates under four segments, which contribute the following amounts into the group's revenues and earnings:
The company's propulsion segment is the largest segment with $2.8 billion in revenues and $523 in operating profit in 2022. The Navico Group segment is an acquisition made by Brunswick in 2021 with a price of $1.05 billion - the company previously had the acquisition under the parts & accessories -segment, but recently separated the two.
Acquisitions aren't a new prospect for Brunswick, although most of their acquisitions are very small in size. For example, the company had a spree of small acquisitions in 2021 and 2022, as they purchased Tampa Bay franchise , SemahTronix , Connecticut Franchise , and Rhode Island franchise to name a few. These acquisitions have bolstered the company's revenues in recent years.
Brunswick's stock price has seen a good increase in price, with a small dividend yield of 1.86% increasing the stock's return:
The company also continues to repurchase their stock, as in Brunswick's Q1 presentation they guided towards repurchases of $200 million for the year.
Financials
Brunswick has had very slightly growing revenues in its past, but with an accelerated growth in 2021 and 2022 due to the company's acquisition of Navico Group and an industry that was boosted by the pandemic:
Brunswick's Revenues (Seeking Alpha)
For the current year, the company's revenue guidance of $6.7 to $6.8 billion represents a decline in revenues of around a percent, as the industry faces some headwinds in demand compared to previous year's figures.
Brunswick has had an impressive history of operating leverage, as the company has had an almost constantly rising operating margin in the long-term:
The current year should be an exception, though, as the consumer sentiment is weaker than in the previous year - in Q2, Brunswick's operating margin fell to 12.2% from previous year's Q2 margin of 15.2%. I believe the company's operating margin was above a sustainable level in 2022, as a pandemic-induced boost in sales should have contributed favourably into the company's bottom line - the margin in 2023 should be more representative of a healthy long-term rate, with possible further slight operating leverage in the future.
As the interest rate rises and worries for the economy arise, Brunswick could be faced with a demand slowdown. With a guidance pointing towards a small decline in revenues, the issues seem to be already known. In the company's Q2 earnings call , CEO David Foulkes told investors:
Shifting to external factors. Higher interest rates and prices continue to be a headwind for buyers, particularly of smaller product with boat loan rates recently exceeding 9%. Wildfires have also impacted an already softer Canadian retail market. From a dealer perspective, sentiment remains cautious. And while inventory levels for Brunswick's channel partners are healthy, dealers are proceeding with some caution and carefully monitoring sales as they plan replenishment. Discounting and promotional activity is close to or at 2019 levels and is being successful in supporting retail in the height of the selling season."
Although this comment could point towards a further weakness in the company's financials in the future, a solid demand is mentioned multiple times in the earnings call; I believe investors should be cautious in the short-term, but as these issues shouldn't last for very long, I don't believe the company's cash flows are under too significant long-term danger.
Brunswick leverages debt to its advantage, as the company has $2510 million of long-term debt on its balance sheet. All of the company's interest-bearing debt seems to be in long-term debt, of which around $88 million is the current portion, to be paid off within a year's period. The company has a cash balance of $478 million, creating a healthy basis to pay out dividends and to continue share repurchases.
Valuation
Brunswick currently trades at a NTM price-to-earnings ratio of 8.51, below its five-year average of 10.91:
As interest rates have climbed higher and as growth is hindering for the company, I believe this is justified. Taking a look at the valuation through a discounted cash flow model, the company seems to be around fairly priced.
In the DCF model I expect Brunswick to hit its revenue guidance for the current year. I price in a small growth for 2024 and a fading growth going forward, as the market conditions normalize - the growth fades into a perpetual growth rate of two percent, on pace with long-term inflation.
I expect Brunswick's operating margin to fall in the current year, as consumer sentiment should stay quite weak for the year - I expect an operating margin of 12.96% compared to 2022's margin of 14.31%. Going forward I expect Brunswick's to have slight further operating leverage, as in my estimates the company's operating margin rises into a margin of 13.23% that continues into perpetuity.
These approximations along with a weighted average cost of capital of 11.20% craft the following DCF model, with a fair value estimate of $82.82, four percent below the stock's price at the time of writing:
The used cost of capital is estimated with a capital asset pricing model:
CAPM of Brunswick (Author's Calculation)
The company had $28.8 million in interest expenses in the second quarter. Annualized, this makes the company's interest rate an approximated 4.59% when compared to the company's long-term debt amount. Brunswick has a good amount of debt - I estimate the company's debt-to-equity ratio to be at around 25% in the long term.
I use the United States' 10-year bond yield as the risk-free rate, with the yield currently being 4.22%. The used equity risk premium of 5.91% is Professor Aswath Damodaran's estimate from July. Yahoo Finance estimates Brunswick's beta to be 1.55 - the company is perceived as quite risky as boat sales can be volatile. Finally, I add a 0.4% liquidity premium into the cost of equity to compensate for the stock's liquidity, crafting a cost of equity of 13.78% and a WACC of 11.20%.
Takeaway
At $85.9 a share, I believe Brunswick is priced fairly. Although the company's investors should be cautious of slowing demand, I believe further small acquisitions and operating leverage could create long-term value for shareholders, balancing short-term concerns. These factors combined with a DCF model pointing towards a fairly valued stock contribute towards my hold-rating evaluation.
For further details see:
Brunswick: Solid History Is Slightly Disturbed By Short-Term Headwinds