Brunswick Corporation: '1-Pager' Summary

Brunswick Corporation (NYSE: BC $77.30) MV = $5.9bln; EV = $7.7bln; 3mo ADV = 0.99mm shares

Trades @ 5.4x 2023E EBITDA; 10x 2023E FCF; Net Leverage Ratio (2021 EBITDA) = 1.8x

Blended Price Target: $111 or 44% Upside

Author: Philippe Kurzweil | pjsubstack@gmail.com        

Date: 5/14/2022   

Disclaimer: I own common shares in BC. Please do your own work.

LINK TO FULL WRITEUP HERE                            

Background: A pure-play marine powerhouse, Brunswick Corporation (ticker: BC) has a compelling growth story yet trades at a ‘peak earnings’ multiple. Some view BC as a highly-cyclical pure-play Boat/Engine OEM that is overearning and closely tied to new boat sales — this strict narrative, however, no longer holds. Today’s BC features three complementary businesses with industry leading positions: Propulsion (40% of revenue and 45% of Operating Income or OI), Parts & Accessories or P&A (33% of revenue and 40% of OI) and Boat/Business Acceleration (27% of revenue and 15% of OI). Growth drivers for Propulsion include market share gains in higher HP outboard engines, bolstered by timely capacity expansions. Growth drivers for P&A include selling integrated solutions to OEMs given its broad portfolio and additional tuck-ins. Growth drivers for Boat include a significant dealer restocking cycle, capacity expansions and the nascent Freedom Boat Club or boating as a service offering.

Financial Profile: Today’s BC is a far more resilient and efficient company than it was heading into the global financial crisis (GFC). Currently, 42% of OI is recurring, including the aftermarket piece of P&A, the ‘repower’ piece of Propulsion (aftermarket engine sales) and the Freedom Boat Club portion of Boat. Gross margins are ~30% and EBITDA margins have expanded into the high-teens, driven by higher margins on new products, better fixed cost absorption and outsized growth of P&A as a % of the total portfolio. To maintain its leadership position and satisfy market demand, BC allocates 3% to R&D and 4-5% in Capex. With growing earnings and normalization of capex and net working capital spend, we expect BC to generate $9.55/share of FCF in 2024.

What’s To Like? In a supply-constrained market, BC is reaping the benefits of its a) vertical integration; b) product innovation and c) alignment with industry trends. With a multi-year inventory restocking cycle, BC has a significant cushion should retail sales slow and a meaningful growth tailwind even if they remain flat. Propulsion’s offerings remain unmatched and it is significantly outgrowing the industry, taking market share. P&A has grown 4-5x from the GFC and is 75% aftermarket – the segment only declined 5% during the GFC. Finally, Boat has a revamped product focus and cost structure, allowing BC to capture the upside of an inventory restocking and mitigating the downside of a recession.

Further, management laid out some compelling data points at a recent investor day. First, BC outlined a path to >50% of earnings from recurring sources and double-digit EPS growth through 2025. Second, BC sensitized its business, showing a downside scenario of just $6-8/share of EPS depending on the magnitude of a recession. Considering the YTD performance of the stock, management is doubling down, more than doubling their share repo to over $300mm given the stock is ‘significantly discounted.’

Why Are We Getting This Opportunity? Market has hit the stock given a) concerns of a recession; b) sell-off of COVID winners and c) potential slowdown in retail sales. Offsets include favorable supply/demand dynamics & inventory restocking and continued unmet demand for boats.

What’s It Worth? On EV/EBITDA basis, a base case SOTP yields $109 (+42%); an upside case justifies a $143 stock (+85%). Downside or recession scenario using a low-end historical multiple on lower EBITDA yields $52 (-33%). Putting it all together, if we assume that our downside/base/upside cases have a 20%/40%/40% probability, our blended target price is $111/share or 44% upside.

What Are The Catalysts? Near-term execution showing the sustainability of industry and BC-specific tailwinds. Capacity expansions/inventory restocking driving the organic growth story with tuck-in M&A in P&A and Freedom Boat Club creating inorganic growth and increasing the share of recurring revenue. Finally, FCF/share ramping from $4.09 in 2021 to $9.55 in 2024 gives capital allocation optionality.

Appendix: Capitalization

Appendix: Income Statement

Appendix: Current Multiples

Appendix: SOTP Valuation (Base and Upside Cases)