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Brunswick Corp. suffered during economic tough times but analysts are encouraged that the Lake Forest-based company will rebound as consumer confidence improves.


Most analysts see Brunswick cruising, despite still-choppy seas

by Elise Menaker
May 10, 2012


BRUNSWICK OUTLOOK GRAPH

Elise Menaker / MEDILL

Between 2008 and 2010 Brunswick Corp. suffered losses as earnings hit as low as $788 million in 2008, but analysts are optimistic the business is recuperating after the economic downturn.

When the economy took a hit and consumers cut back, recreational-products maker Brunswick Corp. was thrown for a big loss, but it's now in early stages of regrowth and analysts are optimistic the company can regain speed. In their optimism, analysts soften some lingering obstacles to recovery.

“I think we’re at a point in their history where the outlook is bright,” said analyst James Hardiman of Longbow Research who posts a price target of $32, compared with the current market of about $24.50.

The Lake Forest-based company designs, builds and markets recreational products across marine, fitness, bowling and billiards industries. The cyclical stock relies heavily on the economy’s ups and downs as a provider of consumers’ ultimate discretionary purchases from boats to pool tables.

Brunswick shareholders got encouraging news when the company announced higher first quarter earnings April 26. The company reported net earnings of $40 million, or 43 cents per diluted share, compared with the year-ago $28 million, or 30 cents per diluted share. Still, the company predicted only a modest outlook, raising just the lower end of its 2012 earnings per share expectation range to $1.30 to $1.50 from $1.20 to $1.50.

“Retail demand is improving, driven in part by stronger used boat prices,” said Craig R. Kennison, Mark R. Altschwager and Daniel A. Ketelsleger of Robert W. Baird & Co. in a research note. “Meanwhile, inventory is lean, supporting healthy dealer orders." Moreover, they added, "efforts to reset the cost structure position [will enable] Brunswick to be significantly more profitable at a much lower level of demand.”

One day after first quarter earnings were announced, the Baird analysts lifted their price target to $33 from $28. They recommend buying the stock, as do six other analysts, while two have a hold rating and one analyst suggests selling. Price targets range from $24 to $41.

Jimmy Baker of B. Riley & Co. LLC has confidence the company will continue to grow as reflected in his $41 price target, the highest of all the analysts.

“I see a huge upside to earnings growth expectations,” said Baker, whose optimism is driven by two changes in the company: operating improvement and capital structure improvement.

The current trailing price-earnings ratio of the stock is 20.08, well above the Standard and Poor’s 500 Stocks P/E of 15.93.

“The company can display significant operating leverage," Baker went on, "but that operating leverage is going to be amplified in earnings growth because they’re repaying their high cost debt.”

He's referring to the long-term debt still hovering over the company. In the four quarters ended March 31, Brunswick reduced its long-term debt by more than $100 million, to $688.7 million from $809.9 million, but at the same time, other long-term liabilities grew to $870.0 million from $832.5 million.

“The company is actively seeking to retire its high cost debt prior to maturity, and may elect to accelerate this process when its 2016 notes become callable next year,” Baker stated.

On the other hand, he said, he’s concerned about, “the potential shareholder value creation that is currently being siphoned away from the equity to service that debt, as well as the underfunded pension."

In their note, the Robert W. Baird analysts stated that “The pension program has been frozen, but pension liabilities remain underfunded by $506 million. . . Brunswick plans to fully fund the pension with available cash, putting a strain on cash flows in the medium term.”

In addition to its debt and pension burdens, Brunswick confronts sluggish sales. In its first quarter of 2012, total sales slumped 1 percent to $974 million, and marine engine sales were down 2 percent to $489 million. Warm weather in the first quarter may have boosted business, but as Hardiman put it, “You don’t buy a boat just because of the weather. It’s the ultimate discretionary purchase.”

International sales in marine engine and boat sectors both dropped 7 percent in the first quarter of 2012. In a first quarter earnings conference call April 26, Chief Executive Officer Dustan McCoy noted that an uncertain European market will continue to be a challenge for the company so it intends to rely more heavily on U.S. markets.

Another drag on the corporation is the production of sterndrive engines, which fell in the aftermath of recession-driven plant consolidations. McCoy admitted he put customers and boat companies through “pain” when the corporation was slow to deliver the high-dollar sterndrive products. The sterndrive production issues could continue until 2013, acknowledged Peter Hamilton, chief financial officer, in the first quarter conference earnings call.

“Eventually [we’ll] see recovery in fiberglass boats,” analyst Hardiman said. “They’re the wealthier consumers and it’s hard to ever count them out.”

To be sure, Brunswick has come a long way from a near-disaster in the recession. In late 2008, the company’s stock price collapsed to $2.03 from $14.96 just a few months earlier. 2009 revenue dropped to $2.78 billion from $4.71 billion the prior year.
In the midst of the economic downturn, the corporation was forced to downsize.

From 2010 to 2011, Brunswick slashed North American boat manufacturing locations from 28 to 11, merged two U.S. engine plants, cut boats brands from 24 to 15, lowered model options by an average of 30 percent and laid off 46 percent of its U.S. workers. The company now employs 15,000 worldwide.

The corporation posted losses in 2008, 2009 and 2010. 2011 was the first time the company made money, reporting earnings of $71.9 million, or 78 cents earnings per diluted share, bouncing back from a loss of $110.6 million, or a loss of $1.25 earnings per diluted share. 2011 sales also rebounded to $3.75 billion, up from $3.40 billion, and are expected to rise to $3.92 billion in 2012.

“I find Brunswick to be pure macro-play,” said Gerrick Johnson of BMO Capital Markets. The analyst went on to explain the company lacks a “hot products cycle” or “expanding demographics” that could protect it from potential slumps in the economy. His rating is neutral and he has a $24 price target, the lowest of all analysts.

Despite lingering problems, the company is moving forward with growth opportunities like the construction of a manufacturing plant in Brazil that will be able to produce more than 400 boats annually. Enhancements in its smaller divisions like the Life Fitness and Bowling and Billiards divisions are highlighted by new merchandise like the Lifescape, a “cardio experience” that features interactive, high-definition hiking, running and biking to famous spots around the world. The company also announced the opening of a 50,000-sqaure-foot Brunswick Zone XL's bowling and entertainment center in Colorado Springs, one of the largest Brunswick bowling and entertainment centers in the United States, Canada and Europe.