Brunswick Corporation: More Downside Ahead

Oct.29.07 | About: Brunswick Corporation (BC)

I obviously got a bit burned in my short of Brunswick (NYSE:BC) by Friay’s earnings announcement, and I’m now sitting on a minor loss. However, this was not unexpected. In fact, more important to me was the conference call, and therefore, I am going to summarize my thoughts on the conference call below.

  • As far as units go, boat sales were very bad, down 10%. I didn’t see the strength of the marine engine division coming, as international business was very strong and overall engine sales were up 6%. I was also surprised by the strength of the fitness division.
  • Sales of marine engines might have also been buoyed with buying in California ahead of new emissions standards in 2008. So we are likely to see some weakening in the marine engine sales in Q1 and Q2 of 2008.
  • The company intends to maintain at least a $300 million cash position in the future. Although they have $251 million left on a buyback, they will not take on more debt or allow the cash to drop to fund the buyback, so the buyback must be funded by operating cash flow. To my mind, this will likely severely limit the ability to complete the buyback over the next several quarters.
  • The company reaffirmed 2007 guidance of $1.20 to $1.30 per share EPS. However, with only one quarter to go, this is a pretty wide range. They obviously have very low visibility regarding Q4.
  • Any sort of commentary about 2008 was completely avoided. Frankly, visibility looks quite low for the company going forward.
  • The company appeared to be basically hoping for a big Q4 from the fitness segment in order to boost Q4. Fitness sales should get a boost from Christmas, but they are still big ticket items. If consumer spending slows, we could be looking at a pretty big problem here.

So, where do I stand after the call? First, I put a heavy short in on MarineMax (NYSE:HZO), which reports next Thursday. The stock moved up Friday in tandem with BC earnings (BC is a major supplier to MarineMax), but investors are missing the key differences between the two companies that make HZO significantly worse off than BC. MarineMax is a pure play on domestic boat sales, and concentrated heavily toward one of the worst markets in the country right now (Florida).

As far as my position in Brunswick goes, I really don’t see Friday’s news as a reason to buy the stock, because the news was certainly not all positive. However, Brunswick’s fitness segment and international exposure are certainly acting to help the company stay above water so far. The bottom line is that, on the basis of the call, BC is only a truly worthwhile short if the economy goes into recession. If fitness sales fall off into a recession, the company is going to have a problem making a profit based solely on international growth (which would also likely slow). My own viewpoint is that we are increasingly likely to fall into a recession, and therefore, I remain comfortable with the position. I may take some short term pain here, but I view it as more likely that the company will begin to trickle downward again with no more good news to boost the stock. If we are really looking forward rather than backward in the markets, there are still plenty of clouds on the horizon for Brunswick.

Disclosure: Author has a short position in BC