BRP: Intangible Asset and Cost Prowess Warrant a Wide Moat Rating; Shares Cheap

We recently upgraded our moat rating for BRP DOO 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.

Moreover, we now believe BRP has also developed a cost advantage stemming from the ability to manufacture more efficiently, with a factory footprint that is more competitive than in the past, spreading fixed costs over higher volumes and negotiating more effectively with vendors. These factors have led to higher operating margins and strong ROICs, which we don’t expect to recede. Additionally, we believe that BRP should realize lower customer acquisition costs through strategic marketing activities (including sponsoring events and addressing accessibility via rental programs). Attracting consumers earlier to the product line up can increase the lifetime value of consumers, benefiting the return on investment.

We have not altered our outlook. Over the next five years, our sales growth outlook averages 6%, benefiting from consistent product launches. This cadence of sales should outpace industry retail sales, which we forecast to fall at a mid-single-digit rate through 2027, largely affected by a low-double-digit decline in 2023 due to the normalization of post pandemic unit demand. Consumer spending patterns on recreational goods and vehicles should return toward a historical proportion of wallet, implying market share gains as spending growth on goods and services normalizes.