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Brunswick Corporation (BC), the maker of Boston Whalers and Hatteras Yachts, has been the come back kid. Since July 14, when it hit a year low of $9.66, it has risen remarkably to $13.79.

Is the climb deserved and will it continue? The company has been hurt this past year by a declining market in the U.S. for its boats and engines. Some of the pain was mitigated by exports overseas and by rises in its much smaller bowling, life fitness, and billiards divisions. The awful U.S. boat sales forced the company to restructure, closing plants and laying off workers to a tune of $83 million, or 59 cents a share.

So, is all the bad news done? No, this stock reminds me of Pilgrim's Pride (PPC), a stock that had a huge run up until reality struck and sent it crashing down. Like Pilgrim's Pride, it's going to head back down.

  1. The motor boat business in the U.S. faces strong head winds. Nothing has changed. Marine Max (HZO) reported declining same store sales of 27%, indicating that customers are not buying boats.
  2. Brunswick had increasing sales of motor boats and engines outside of the U.S. That piece will be missing in the future as Europe and Asia slow and the dollar strengthens.
  3. The banks are well aware of Brunswick's worsening business. Brunswick recently refinanced $250 million dollars at an unattractive 9.75% rate. That rate replaces a much better floating rate of USD libor (currently 2.61%) + 0.68% margin. The 9.75% rate eats into their profit far more than the previous 3.29%. They loosened the debt covenants to give Brunswick a little breathing room but not by much and at a big cost.
  4. Brunswick is on the hook to take back $158 million worth of boats from its dealerships in the event they default. (10Q) Dealerships are having trouble unloading their inventories.
  5. The company, in partnership with GE (GE), provides significant financing to dealerships and customers. Marine recreational vehicles has been a terrible business to be in lately. In July, boat sales were down 20% over last year according to the National Marine Manufacturers Association. One could expect dealerships to go under and Brunswick to pick up some of the tab in lost financing. The credit business is not a good place to be in.
  6. Share value has been rising as the price of oil decreases. Any increase in oil will take down Brunswick shares.

Nothing good is happening in the recreational boat business. Expect Brunswick to return to its lows.

Disclosure: Author holds a short position in BC

Source: Brunswick Corporation: Is the Bad News Over?