Recently, a fear of future water shortages has increasingly been mentioned with Matt Damon even going so far as to go on a "toilet strike." From this, most normal investors upon hearing the word shortage would immediately start searching for water suppliers, chemical companies, etc. But, taking a different angle, I started to think of other companies that benefit from water's non-consumption related aspects, which lead me to Brunswick Corporation (BC).
Brunswick Corporation, now over 165 years old, is one of the largest recreational boating companies in the world. It owns 26 different Boating brands such as Sea Ray and QuickSilver, as well as Brunswick Bowling and Billiards and Lifetime Fitness.
Mr. Market Likes this one!
Only great things can be said about the stock price appreciation of Brunswick Corporation in 2012. In the previous year, shares have moved from June lows of $19 to $37 (Almost 100%); they currently sit at $35 per share. Unfortunately, it doesn't appear fundamentals show any correlation to this movement.
Revenue was reportedly up over 9% for 2012 but unfortunately, increased sales don't always translate into increased income. A closer look at 4th quarter earnings shows loses from its boating segment and only modest income from the bowling and fitness lines.
Boats, for most, are luxury items and Brunswick has been facing the same economic headwinds the rest of the world has. A line on the yearly overview sums it up best, in 2012 Brunswick was able to "successfully execute its business strategy, despite challenging global economic conditions."
In 2012 sales in Europe, which accounts for roughly 9% of all sales, were 15% lower. This is a trend I believe will continue in Europe and the rest of the world throughout 2013 as currency turmoil and unemployment across the globe continues.
How to weather the storm?
Sales aside, costs will continue to be one of the determining factors for this boating giants' success. Luckily for shareholders, management has been aggressively taking action to reduce debt as of late. In the last two years it has reduced debt by over $259 million (to $572 million) with plans for further reductions in the range of $100-125 million in 2013.
Another cost cutting measure Brunswick took in 2012 was made by selling its Hatteras and Cabo boating lines. This may be an indication of where Brunswick's future lies as it still has 26 other boating brands under its umbrella. Could you imagine if GM had 26 different car lines?
Back to that valuation...
It's hard not to reiterate the price tag placed on Brunswick's shares. At $35.00 per share, it is yielding a P/E ratio of close to 30x's earnings. With only $77 million in equity it's currently being valued at $3.12 billion dollars! To put this into perspective, under current market conditions, the Coca-Cola Company (KO) is only currently getting a P/E of 20 times! I used turnaround king (GM) above and even they are only getting a P/E ratio of 9!
To get straight to it, the stock price for Brunswick Corporation looks to be setting itself up for a major decline. With sale pressures already showing up in Europe and inflation from QE sure to come, I don't see a whole lot of discretionary income being spent on luxury boats in the near future. With this in mind, due to the QE winds in its sails, Brunswick definitely seems to be in uncharted and highly over-valued waters.