Brunswick Corporation: Is the Bad News Over?

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

Comments

[Stephen Rosenman]

Analyst expectations for next quarter are declining rapidly per Yahoo:
EPS Trends Sep-08

Current Estimate -0.43
7 Days Ago -0.44
60 Days Ago 0.04
90 Days Ago 0.15

2008 Aug 31 09:48 PM

[Stephen Rosenman]

One wonders whether Brunswick has pushed boats onto dealers who cannot sell them. Next quarter should see whether the pipeline has been choked.

2008 Aug 31 09:49 PM

[Stephen Rosenman]

BC last quarter held up with overseas vessel sales. See what is happening with car sales overseas in Europe in French and Italian markets. They are cratering. My guess is that BC sales will slump in Europe paralleling the auto market.

2008 Sep 01 01:26 PM

[soonerxii]

How could anyone feel good about owning shares of a boat company when we are in a consumer led recession? Not to mention it appears that we are on the brink of economic disaster as the housing bubble unwinds.

2008 Sep 02 11:46 AM

[water rep]

Brunswick should never have initiated a range war with the Japanese outboard manufactors over "dumping practices". They are also guilty with their private label imports from third world countries. It really hurt the industry a few years back when times were much good and nobody won.

2008 Sep 02 05:55 PM

[percmo]

While I have friends and associates at Brunswick (Mercury Marine) and independent boat dealerships, I am not surprised by the free fall they are in. Boat builder purchasing and dealer top loading has taken it's toll on the company through the arrogance of it's leaders.

This is the type of Corporate American leadership that lends itself to foreign hostile takeover. That would be the worst possible scenerio for the company, it's US employees and the American public.

Wake up Brunswick!

2008 Sep 02 09:00 PM

[Miami]

Percmo above is right on target -- I also know a larger number of people inside of BC - and have worked closely with them. The arrogance of their top leaders is incredible. Decisions are made totally from ego. I have never seen such a large company, run by such small people. As an outsider, I have sat on the sidelines in disbelief, watching major blunder after blunder - with the top C-level people still convinced that they are invincible. I wish no one ill-will, but perhaps these folks needed to be taken down a few notches to help them understand that they do not rule the world -- they need to be in touch with their people, dealers, customers and the market. Reminds me a bit of IBM back in the early 90's when they thought they ran the entire global computer industry and began alienating their customers and ignoring market trends. Luckily IBM turned it around in an impressive fashion, but I do not feel confident that BC has the top-level brain power or humility to do the same. I also predict more rough seas ahead for Brunswick.

2008 Sep 03 10:18 AM

[MASTERTECH]

Amen. I watched the same sort of egocentric activity as the MBA's and marine biz ignorant managers at OMC ran the largest manufacturer of outboard motors in the world into bankruptcy in 5 years.

2008 Sep 03 12:51 PM

[mytwobits]

yep....they are in trouble and still not learned anything from past experiences like the late 80's when they was going to turn the whole boat biz around via packaging! perhaps we're going to witness the breakup of brunswick's boat divisions and a smaller company that focus on building motors...treating its partners like partners instead of targets to backstab once again become a decent company. needs to happen...and the whole industry will be better for it happening. boat builders do what they do best and motor companies do what they do best....then we all regain being creative and attracting consumers. few new things come from giant companies like brunswick except arrogance....certainly not original ideas. I feel for the employees....but in the long run they will benifit more via jobs staying at home and people owning their new companies that care about their employees and can manage things better.

2008 Sep 03 03:35 PM

[Sailaway]

It seems a bit risky to say the least to short a stock that has already declined from $50 to $13. Yes, there is a consumer led recession and yes people are not rushing to buy boats, but all this is has been news for the last two years. As soon as there is a sniff of consumer recovery this stock will run to mid $20s. Bankruptcy? Please, these guys have less than 1x EBITDA net debt.

2008 Sep 04 05:27 PM

[Ranni]

"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."

I could confirm that. Iam from scandinavia and this is last place (in Europe) where economy is doing relatively well. But not any more. Its few weeks ago when BC layoff almost all its workers in Bella (joint venture in Finland). Couple of next quarters and we will see really ugly results from BC. I think shorting BC at these levels is good idea!

2008 Sep 14 11:25 AM