Brunswick Earnings: Slowing Boat Demand Sinks Shares, but Long-Term Fundamentals Intact

At its September investor day, narrow-moat Brunswick BC said that third-quarter earnings would probably land at the low end of its previous guidance range (sales slightly down, EPS of $2.35), and reported results strayed only modestly, with sales down 6% to $1.6 billion and adjusted EPS of $2.42. Like other manufacturers, Brunswick is facing slowing demand for high-ticket items, with boat sales down 16% in the period, in line with our previous estimate of a 15% decline. Additionally, 1% sales growth in propulsion fell shy of our expectation of a 6% increase, but it still posted 90 basis points of market share improvement, according to the firm. Not surprisingly, weak sales led to profit compression, with Brunswick’s operating margin contracting 200 basis points to 14.4%, dragged down by slower boat production and higher promotions.

Further, a full-year outlook that includes $6.45 billion-$6.5 billion in sales and $9.00 in EPS is below our preprint estimates of $6.6 billion and $9.49 in EPS, prompting us to lower our fourth-quarter forecast. The firm’s outlook implies the fourth quarter is set for a 6% sales decline and around $1.65 in EPS, below the $2-plus in EPS we had expected. This, along with the likelihood of continued demand softness into 2024, prompt us to lower our $114 fair value estimate by a mid-single-digit rate, but we still view shares as very undervalued. However, we contend this is a function of a macroeconomic environment that should ultimately prove transitory, rather than any fundamental issues with the business.