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Brunswick (NYSE:BC) Misses Q4 Revenue Estimates


Full Report / February 01, 2024

Boat and marine manufacturing company Brunswick (NYSE:BC) fell short of analysts' expectations in Q4 FY2023, with revenue down 14% year on year to $1.36 billion. Next quarter's revenue guidance of $1.35 billion also underwhelmed, coming in 17.7% below analysts' estimates. It made a non-GAAP profit of $1.45 per share, down from its profit of $1.99 per share in the same quarter last year.

Brunswick (BC) Q4 FY2023 Highlights:

  • Market Capitalization: $5.55 billion
  • Revenue: $1.36 billion vs analyst estimates of $1.44 billion (5.4% miss)
  • EPS (non-GAAP): $1.45 vs analyst expectations of $1.65 (11.9% miss)
  • Revenue Guidance for Q1 2024 is $1.35 billion at the midpoint, below analyst estimates of $1.64 billion
  • EPS (non-GAAP) Guidance for Q1 2024 is $1.35 at the midpoint, below analyst estimates of $2.22
  • Management's revenue guidance for the upcoming year 2024 is $6.1 billion at the midpoint, missing analyst estimates by 3.8% and implying -4.7% growth (vs -6.1% in FY2023)
  • Free Cash Flow of $241.8 million, up 74.6% from the previous quarter
  • Gross Margin (GAAP): 26.8%, down from 29.6% in the same quarter last year

Formerly known as Brunswick-Balke-Collender Company, Brunswick (NYSE: BC) is a designer and manufacturer of recreational marine products, including boats, engines, and marine parts.

Brunswick was founded in the 19th century, initially carving a niche in products like billiards before pivoting to the marine industry. It was created out of a vision to deliver high-quality products that enhance leisure time. Brunswick shifted to the marine industry to take advantage of the expanding leisure market and the appeal of boating.

The company presents a diverse array of marine vehicles and high-performance outboard engines, serving both leisure boaters and professionals. The selection spans from modest-sized vessels suitable for family leisure to advanced marine craft engineered for demanding oceanic excursions.

Brunswick’s primary revenue streams come from boat and engine sales, complemented by a strong aftermarket presence for parts and accessories. It also has a comprehensive dealer network that helps sell its products

Leisure Facilities and Products

Consumers have lots of choices when it comes to how they spend their free time and extra money, so the companies offering leisure products and experiences must highlight their value proposition. Fitness companies may be riding the wellness trend, for example, while those selling recreational vehicles or toys may have to lean into innovation to stand out. Either way, all leisure companies must compete against the 800-pound gorilla of social media and streaming entertainment, which offer instant gratification and have been taking share of consumers’ free time for over a decade.

Competitors in the recreational marine industry include Malibu Boats (NASDAQ:MBUU), Marine Products (NYSE:MPX), and MasterCraft Boat (NASDAQ:MCFT).

Sales Growth

A company’s long-term performance can give signals about its business quality. Any business can put up a good quarter or two, but many enduring ones muster years of growth. Brunswick's annualized revenue growth rate of 8% over the last 5 years was weak for a consumer discretionary business. Brunswick Total RevenueWithin consumer discretionary, a long-term historical view may miss a company riding a successful new product or emerging trend. That's why we also follow short-term performance. Brunswick's recent history shows its growth has slowed, as its annualized revenue growth of 4.6% over the last 2 years is below its 5-year trend.

This quarter, Brunswick missed Wall Street's estimates and reported a rather uninspiring 14% year-on-year revenue decline, generating $1.36 billion of revenue. The company is guiding for a 22.6% year-on-year revenue decline next quarter to $1.35 billion, a reversal from the 2.8% year-on-year increase it recorded in the same quarter last year. Looking ahead, Wall Street expects revenue to remain flat over the next 12 months.

Operating Margin

Operating margin is an important measure of profitability. It’s the portion of revenue left after accounting for all core expenses–everything from the cost of goods sold to advertising and wages. Operating margin is also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Brunswick has done a decent job managing its expenses over the last eight quarters. The company has produced an average operating margin of 12.6%, higher than the broader consumer discretionary sector.

Brunswick Operating Margin (GAAP)

This quarter, Brunswick generated an operating profit margin of 8%, down 4.2 percentage points year on year. This reduction indicates the company was less efficient with its expenses over the last year, spending more money in areas like corporate overhead and advertising.

Over the next 12 months, Wall Street expects Brunswick to break even on its operating profits. Analysts are expecting the company’s operating margin to decline.

EPS

Analyzing long-term revenue trends tells us about a company's historical growth, but the long-term change in its earnings per share (EPS) points to the profitability and efficiency of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions.

Brunswick EPS (Adjusted)

Over the last 5 years, Brunswick's EPS grew 107%, translating into a solid 15.7% compounded annual growth rate. This performance is materially higher than its 8% annualized revenue growth over the same period. Let's dig into why.

Over the last 5 years, the company has repurchased its shares and shrunk its share count by 21.5%, leading to higher PER share earnings. Other line items like taxes and interest expenses can also affect EPS growth, but they don't tell us as much about a company's fundamentals.

In Q4, Brunswick reported EPS at $1.45, down from $1.99 in the same quarter a year ago. This print unfortunately missed analysts' estimates, but we care more about long-term EPS growth rather than short-term movements. Over the next 12 months, Wall Street is projecting Brunswick's EPS to stay the same.

Cash Is King

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can't use accounting profits to pay the bills.

Over the last two years, Brunswick has shown mediocre cash profitability, putting it in a pinch as it gives the company limited opportunities to reinvest, pay down debt, or return capital to shareholders. Its free cash flow margin has averaged 5.3%, subpar for a consumer discretionary business.

Brunswick Free Cash Flow Margin

Brunswick's free cash flow came in at $241.8 million (17.8% margin) in Q4, up 30.2% year on year.

Over the next year, analysts predict Brunswick's cash profitability will fall. Their consensus estimates imply a 4.6 percentage point decrease in the company's free cash flow margin.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company's revenue growth was profitable. But was it capital-efficient? If two companies had equal growth, we’d prefer the one with lower reinvestment requirements.

Understanding a company’s ROIC (return on invested capital) gives us insight into this because it factors the total debt and equity needed to generate operating profits. This metric is a proxy for not only the capital efficiency of a business but also a management team's ability to allocate limited resources.

Although Brunswick hasn't been the highest-quality company lately, it historically did a solid job investing in profitable growth initiatives. Its five-year average ROIC was 19.4%, higher than most consumer discretionary companies.

The trend in its ROIC, however, is often what surprises the market and drives the stock price. Unfortunately, over the last two years, Brunswick's ROIC has averaged a 4.6 percentage point decrease each year. We like Brunswick's average ROIC but are concerned it has declined recently, perhaps a symptom of waning opportunities to invest profitably.

Key Takeaways from Brunswick's Q4 Results

We struggled to find many strong positives in these results. BC missed estimates for this quarter and its full-year revenue and earnings guidance also missed analysts' expectations. Overall, the results could have been better. The company is down 4.7% on the results and currently trades at $76.82 per share.

Is Now The Time?

Brunswick may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We cheer for all companies serving consumers, but in the case of Brunswick, we'll be cheering from the sidelines. Its revenue growth has been a little slower over the last five years, and analysts expect growth to deteriorate from here. And while its average annual EPS growth over the last five years has exceeded its peer group average, the downside is its declining ROIC shows it's struggled to find compelling investment opportunities. On top of that, its projected EPS for the next year is lacking.

Brunswick's price-to-earnings ratio based on the next 12 months is 9.2x. While the price is reasonable and there are some things to like about Brunswick, we think there are better opportunities elsewhere in the market right now.

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