Brunswick: Launching Coverage With a Narrow Moat Rating and $118 Fair Value Estimate

We are initiating coverage of Brunswick BC with a $118 fair value estimate and view shares as attractive. While share have risen 18% year to date through Aug. 9, they have largely traded sideways over the last six months, which we believe is a result of investor concern around consumer health. Our valuation considers both Brunswick’s financial projections and our internal outlook for recreational products. Brunswick has fiscal 2025 goals of $10 billion in sales, a 17% operating margin, and $16.00-$17.50 in EPS. We forecast sales of $7.3 billion, a 14% operating margin, and EPS of $11.08 in fiscal 2025 given our more tepid industry growth prognosis. While demand for outdoor recreational products rose significantly due to social distancing measures during the pandemic, we expect category retail sales to moderate over the next few years (to 2%) as consumers reallocate spending to other categories. Still, we think Brunswick should take share, with firmwide sales set to grow 3% on average over the next decade, including acquisitions.

We rate Brunswick moat as narrow due to its brand intangible asset, as evidenced by the company’s robust market share in the important propulsion market (nearly 50% in U.S. outboard boats) and well-known boat brands (Sea Ray, for example). This is bolstered by its vertically integrated parts and accessories business, lifting the consumer experience. Successful product development across these categories has offered Brunswick strong adjusted returns on invested capital, including goodwill, that have averaged 25% during the past five years, outpacing our 9% weighted average cost of capital estimate. We expect these healthy returns to continue and forecast a 10-year average ROIC, including goodwill, of 26%.