Company Reports

Fiscal 2024 (ending January) showed another year of positive sales growth, although the cadence of demand growth has slowed, crimped by macroeconomic headwinds. We contend this is a function of the cycle and expect that BRP's continued focus on its long-term product and operational priorities will allow it to maintain strong competitive positioning. BRP's strategic priorities focus on market share growth, lean operations, and cultivating an engaged workforce, all while honing in on evolving customer demands. With manufacturing facilities located near demand (for example, personal watercraft in Mexico) and timely spend to increase facility capacity as needed, BRP should continue to capture efficiencies from its plants. Firmwide centers of expertise and excellence allow BRP to manufacture optimally, improving utilization and allowing it to bring products to market quickly, ensuring a continually relevant and in-demand product lineup. Because BRP is exposed to many customer segments, we don’t believe acquisitions are required for expansion. However, we think entry into white-space categories (like motorcycles) and small acquisitions, particularly in parts and accessories or marine, are possible and could support growth.

Wide-moat BRP is entering fiscal 2025 with a postpandemic hangover as industry sales continue to moderate. Sales in the fourth quarter fell 12.5% to CAD 2,692 million as BRP lapped tough comps in the seasonal category (down 28%) with strong shipments in the prior year as supply chain issues improved in that period. Moreover, unfavorable weather patterns packed a punch to the firm’s seasonal segment, a key factor leading to its 18%-22% sales decline outlook for the coming year. The weakness in sales across multiple segments (marine contracted 32% while parts, accessories, and engines declined 23%) drove massive expense deleverage across line items, with total operating expenses expanding more than 600 basis points as a percentage of sales. Additionally, the firm ceded share across ATVs and marine, while gaining share solely in the side-by-side market.

The previously resilient consumer appears to have hit a roadblock in October, as evidenced by BRP’s retail sales declining across all geographies after capturing positive sales growth in the August and September period. We contend that caution around the discretionary spending environment was the primary factor in BRP’s reduced outlook for fiscal 2024, including sales growth of 4%-5% (versus 7%-10% prior) and EPS of CAD 11.10-CAD 11.35 (versus CAD 12.35-CAD 12.85 prior), sending shares down 10% on the print. We expect cautious rhetoric will persist into next year as dealers face higher floorplan financing costs and a higher promotional cadence becomes more pervasive industrywide. As such we plan to lower our CAD 135 ($99) fair value estimate by a mid-single-digit rate. This change stems from the inclusion of third-quarter results and a softer fourth quarter (CAD 6 impact), time value (CAD 3 benefit), and a proactive reduction to our fiscal 2025 outlook (about CAD 6 impact). Still, this leave shares very undervalued.

Fiscal 2024 (ending January) should be another solid year for BRP's sales thanks to resilient consumer demand across its year-round segment (48% of fiscal 2023 revenue). With a team that remains focused on its long-term product and operational priorities, we believe BRP should continue to maintain strong competitive positioning. BRP's strategic priorities focus on market share growth, lean operations, and cultivating an engaged workforce, all while honing in on evolving customer demands. With manufacturing facilities located near demand (for example, personal watercraft in Mexico) and timely spend to increase facility capacity as needed, BRP should continue to capture efficiencies from its plants. Firmwide centers of expertise and excellence allow BRP to manufacture optimally, improving utilization and allowing it to bring products to market quickly, ensuring a continually relevant and in-demand product lineup (with electric vehicle offerings expected in all segments by 2026). Because BRP is exposed to many customer segments, we don’t believe acquisitions are required for expansion. However, we think entry into white-space categories (like motorcycles) and small acquisitions, particularly in parts and accessories or marine, are possible and could support growth.

We were struck by the deceleration in wide-moat BRP’s marine business in fiscal 2024's second quarter. Marine segment sales of CAD 127 million fell 5%, and the company materially reduced its full-year outlook, with expected wholesale growth of just 5%-10% versus 35%-40% previously. This adjustment was likely in response to marine retail sales, which fell 44% as a result of weaker consumer interest—a theme across marine companies recently—and lower product availability. But marine represented just 5% of BRP’s sales in fiscal 2023, and demand across the important year-round and seasonal segments (more than 80% of sales) remains unfettered. In fact, BRP maintained its full-year outlook for sales growth of 16%-19% in year-round and roughly flat performance in seasonal, with recent market share gains—reaching highs in personal watercraft, ATVs, and side-by-sides—indicating continued interest in the brand. As a result, we don’t plan to alter our CAD 135/$106 fair value estimate, and we view the shares as undervalued.

We recently upgraded our moat rating for BRP to wide from narrow, after considering the evolution of performance and profitability at the firm. In turn, this led to an increase in BRP's fair value estimate to CAD 135 ($106) from CAD 129, as we expect the firm to capture excess economic returns over a longer period. But the market has taken a gloomier outlook on shares, which trade at a 20% discount, placing too much weight on near-term challenges surrounding consumers' appetite to spend against a weak economic backdrop. However, we believe such behavior is transitory and won't hinder the long-run positioning of BRP's top notch brands, which have supported the firm's intangible asset.

Fiscal 2024 (ending January) should be another banner year for BRP's sales given resilient consumer demand despite only modest backfill of units remaining at its dealers. Thanks to a team that remains focused on its long-term product and operational priorities, we believe the firm should continue to maintain strong competitive positioning. BRP's strategic priorities focus on market share growth, lean operations, and cultivating an engaged workforce, all while honing in on evolving customer demands. With manufacturing facilities located near demand (for example, personal watercraft in Mexico) and timely spend to increase facility capacity as needed, BRP should continue to capture efficiencies from its plants. Firmwide centers of expertise and excellence allow BRP to manufacture optimally, improving utilization and allowing it to bring products to market quickly, ensuring a continually relevant and in-demand product lineup (with electric vehicle offerings in all segments by 2026). Because BRP is exposed to many customer segments, we don’t believe acquisitions are required for expansion. However, we think entry into white-space categories (like motorcycles) and small acquisitions, particularly in parts and accessories or marine, are possible and could support margin improvement.

Fiscal 2024 (ending January) should be another banner year for BRP's sales given resilient consumer demand despite only modest backfill of units remaining at its dealers. Thanks to a team that remains focused on its long-term product and operational priorities, we believe the firm should continue to maintain strong competitive positioning. BRP's strategic priorities focus on market share growth, lean operations, and cultivating an engaged workforce, all while honing in on evolving customer demands. With manufacturing facilities located near demand (for example, personal watercraft in Mexico) and timely spend to increase facility capacity as needed, BRP should continue to capture efficiencies from its plants. Firmwide centers of expertise and excellence allow BRP to manufacture optimally, improving utilization and allowing it to bring products to market quickly, ensuring a continually relevant and in-demand product lineup (with electric vehicle offerings in all segments by 2026). Because BRP is exposed to many customer segments, we don’t believe acquisitions are required for expansion. However, we think entry into white-space categories (like motorcycles) and small acquisitions, particularly in parts and accessories or marine, are possible and could support margin improvement.

Narrow-moat BRP’s first-quarter performance was stellar, with total sales rising 34% thanks to year-round (55% of mix) sales that rose 43% and seasonal sales (28%) that grew 69%. However, these figures were lapping a quarter a year ago riddled with supply-chain issues, where the firm delivered a 1% rise in year-round and a 12% decline in seasonal products. Even still, such sales growth allowed BRP to deliver 70 basis points of adjusted operating margin expansion, benefiting from gross margin gains (70 basis points, to 25.7%) thanks to pricing, mix, and lower logistics costs. But the rest of fiscal 2024 is set for a slowdown in both year-round and seasonal sales, which now include low-double-digit growth and low-double-digit declines, respectively. With North American dealer inventory nearly back to optimal levels (4% above fiscal 2021’s first quarter and up 216% from last year), we expect shipments will match demand more closely ahead, normalizing at a low-single-digit rate.

Fiscal 2024 should be another banner year for BRP's sales given resilient consumer demand and some backfill units still needed at its dealers. However, we don't think this will distract the team from its long-term product and operational priorities, which should improve the firm's competitive positioning. BRP's strategic priorities focus on market share growth, lean operations, and cultivating an engaged workforce, all while honing in on evolving customer demands. With manufacturing facilities located near demand (for example, personal watercraft in Mexico) and timely spend to increase facility capacity as needed, BRP should continue to capture efficiencies from its plants. Firmwide centers of expertise and excellence allow BRP to manufacture optimally, improving utilization and allowing it to bring products to market quickly, ensuring a continually relevant and in-demand product lineup (with electric vehicle offerings in all segments by 2026). Because BRP is exposed to many customer segments, we don’t believe acquisitions are required for expansion. However, we think entry into white-space categories (like motorcycles) and small acquisitions, particularly in parts and accessories or marine, are possible and could support margin improvement.

We don’t plan any material change to our CAD 136 ($101) fair value estimate for BRP after incorporating better-than-expected fourth-quarter results and tamer-than-projected fiscal 2024 expectations into our model. We view shares as undervalued, trading at a more than 20% discount.

Fiscal 2023 should be another banner year for BRP's sales given still robust consumer demand and high level of backfill units needed at its dealers. However, we don't think this will distract the team from its long-term product and operational priorities, which should improve the firm's competitive positioning. BRP's strategic priorities focus on market share growth, lean operations, and cultivating an engaged workforce, all while honing in on evolving customer demands. With manufacturing facilities located near demand (for example, personal watercraft in Mexico) and timely spend to increase facility capacity as needed, BRP should continue to capture efficiencies from its plants. Firmwide centers of expertise and excellence allow BRP to manufacture optimally, improving utilization and allowing it to bring products to market quickly, ensuring a continually relevant and in-demand product lineup (with electric vehicle offerings in all segments by 2026). Because BRP is exposed to many customer segments, we don’t believe acquisitions are required for expansion. However, we think entry into white-space categories (like motorcycles) and small acquisitions, particularly in parts and accessories or marine, are possible and could support margin improvement.

Narrow-moat BRP posted stellar third-quarter results that included sales of CAD 2.7 billion (up 71%) and normalized EPS of CAD 3.46 (up 146%) handily outpacing our CAD 2.2 billion and CAD 2.42 forecasts. The year-round and seasonal segments, together composing 85% of sales, outperformed, with sales rising 74% and 133%, respectively. And despite robust growth, we don’t fear channel stuffing given that third-quarter retail sales rose 39% ex-pontoons and 40% of fourth-quarter units were presold at quarter-end. Additionally, overall dealer inventory remains 20% below the prepandemic (third-quarter 2020) level, with the sizable ORV segment down 42%, resulting in a CAD 750 million inventory backfill opportunity. Full-year sales growth guidance was lifted to 27%-32% (from 26%-31%), in line with our 28% preprint estimate, and implies fourth-quarter sales that slow to a low-20% pace. This would represent a fourth-quarter sales level 45% higher than the quarter ended Jan. 31, 2020.

Fiscal 2023 should be another banner year for BRP's sales given still robust consumer demand and high level of backfill units needed at its dealers. However, we don't think this will distract the team from its long-term product and operational priorities, which should improve the firm's competitive positioning. BRP's strategic priorities focus on market share growth, lean operations, and cultivating an engaged workforce, all while honing in on evolving customer demands. With manufacturing facilities located near demand (for example, personal watercraft in Mexico) and timely spend to increase facility capacity as needed, BRP should capture efficiencies in its plants. Firmwide centers of expertise and excellence should allow BRP to manufacture optimally, improving utilization and allowing it to bring products to market quickly, ensuring a continually relevant and in-demand product lineup (with electric vehicle offerings in all segments by 2026). Because BRP is exposed to many customer segments, we don’t believe acquisitions are required for expansion. However, we think entry into white-space categories (like motorcycles) and small acquisitions, particularly in parts and accessories or marine, are possible and could support margin improvement.

We plan to lift our CAD 122 fair value estimate for narrow-moat BRP by a high-single-digit rate after digesting second-quarter results and nudging our back half expectations a bit higher. Second-quarter sales and profits outpaced our expectations, with sales of $2.44 billion (up 28%) ahead of our $2.37 billion preprint estimate. This was mostly attributable to the year-round segment, which delivered 42% growth, helped by strong side-by-side and three-wheeled vehicle shipments. EPS of $2.94 were also better than our $2.78 forecast, helped by constrained selling and marketing spend, as the industry limits its activity given the lack of inventory to promote. Given the company's continued efforts to shift production to units with most relevant seasonality and best component availability, BRP was able to grab retail share in North America in its side-by-side, ATV and three-wheeled vehicle segments. We surmise these gains will neutralize as component access improves across the industry over the next six to nine months.

We don't plan any material change to our CAD 122/$97 per share fair value estimate for narrow-moat BRP after incorporating updates from its investor day. While an updated fiscal 2025 plan was offered, calling for more than CAD 12 billion in sales and EPS of CAD 13.50-CAD 14.50, this wasn't far from our existing fiscal 2025 projections, which included sales of above CAD 11 billion and EPS of CAD 13.67. For reference, the prior 2025 plan (issued in 2019) sought CAD 9.5 billion in sales and EPS of CAD 7.50 (which the firm handily surpassed in 2021, at CAD 9.92 in adjusted EPS). The majority of the outlook's upside stems from the Can-Am brand, which is set to capture more than CAD 7 billion in sales in fiscal 2025, CAD 2 billion higher than earlier forecasts. While an incremental CAD 100 million in cost savings is now set to be achieved (on top of the CAD 300 million set forward in 2019), we don't expect to raise our long-term EBITDA margin outlook much higher than the 16% we already model (a touch lower than the 17% the firm is targeting), as we expect sales programs could become more competitive across the peer set, constraining profit gains.

Fiscal 2023 should be another banner year for BRP's sales given still robust consumer demand and high level of backfill units needed at its dealers. However, we don't think this will distract the team from its long-term product and operational priorities, which should improve the firm's competitive positioning. BRP's strategic priorities focus on market share growth, lean operations, and cultivating an engaged workforce, all while honing in on evolving customer demands. With manufacturing facilities located near demand (for example, personal watercraft in Mexico) and timely spend to increase facility capacity as needed, BRP should capture efficiencies in its plants. Firmwide centers of expertise and excellence should allow BRP to manufacture optimally, improving utilization and allowing it to bring products to market quickly, ensuring a continually relevant and in-demand product lineup (with electric vehicle offerings in all segments by 2026). Because BRP is exposed to many customer segments, we don’t believe acquisitions are required for expansion. However, we think entry into white-space categories (like motorcycles) and small acquisitions, particularly in parts and accessories or marine, are possible and could support margin improvement.

We plan to raise our CAD 115 ($92) fair value estimate for narrow-moat BRP by a low-single-digit rate after assessing first-quarter results and accounting for time value. We view shares as undervalued, trading at a 25% discount to our updated intrinsic value and believe the investment case for BRP is compelling. Even with persistent supply chain constraints (limiting retail product), BRP was able to deliver flat sales (at CAD 1.8 billion), although this was largely attributable to parts, accessories, and apparel sales, which rose 14%. Hard goods sales were more difficult to capture given ongoing delays in components, resulting in year-round product sales that climbed just 1%, while seasonal sales contracted 12% (which we expect to reverse in the second quarter as more components are allocated to the segment). EBITDA was 15% of sales, versus 21% last year, with gross profit declines packing the biggest punch due to inflation.

Fiscal 2023 should be another banner year for BRP's sales given the still robust consumer demand and high level of backfill units needed at its dealers. However, we don't think this will distract the team from its long-term product and operational priorities, which should improve the firm's competitive positioning. BRP's strategic priorities focus on market share growth, lean operations, and cultivating an engaged workforce, all while honing in on evolving customer demands. With manufacturing facilities located near demand (for example, personal watercraft in Mexico) and timely spend to increase facility capacity as needed, BRP should capture efficiencies in its plants. Firmwide centers of expertise and excellence should allow BRP to manufacture more optimally, improving its utilization and allowing it to bring products to market quickly, ensuring a continually relevant and in-demand product lineup (with electric vehicle offerings in all segments by 2026). Because BRP is exposed to many customer segments, we don’t believe acquisitions are required for expansion. However, we think entry into white-space categories and small acquisitions, particularly in parts and accessories as well as marine, are possible and could support margin improvement.

We plan to raise our CAD 113 fair value estimate ($88 for U.S.-listed shares) for narrow-moat BRP by a mid-single-digit rate after incorporating fourth-quarter results and an updated outlook for fiscal 2023. The fourth-quarter print was in line with our CAD 2.3 billion forecast (up 28%), bolstered by strong sales across all segments--year-round products rose 12% to CAD 853 million; seasonal jumped 56% to more than CAD 1 billion; parts and accessories and engines increased 21% to CAD 311 million; and marine lifted 6% to CAD 135 million. Successful performance despite supply chain challenges stem from BRP’s ability to nimbly pivot and deliver products that were in season (snowmobiles), maximizing throughput. This further allowed for stellar absorption of fixed costs, driving full-year adjusted EBITDA margin to 19%, roughly 80 basis points ahead of our forecast, the high-water mark over the past decade.