Brunswick Corporation

Moat: 2.5/5

Understandability: 2/5

Balance Sheet Health: 4/5

Brunswick Corporation is a global leader in marine products, specializing in boat engines, parts, and accessories. The company is also focusing on digital solutions and providing innovative technologies.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Brunswick Corporation is a leading manufacturer and seller of marine products, including boat engines, parts, and accessories, as well as boats themselves. The company’s portfolio includes well-known brands like Mercury, Sea Ray, Boston Whaler, and Navico, among others. Brunswick operates in three main segments: Propulsion, Parts & Accessories, and Boat.

Revenue Distribution

  • Propulsion (P&A): This segment primarily focuses on manufacturing and selling outboard, sterndrive, and inboard engines as well as related systems and controls. It also includes the Mercury brand which commands a leading position in many of its product categories.
  • Parts and Accessories: It provides a range of parts and accessories for the boating industry, often through their distribution channels. This includes brands such as Mercury Genuine Parts and Accessories.
  • Boat Segment: Comprises sales of boats through a global network of dealers and distributors. Brands here include Boston Whaler, Sea Ray, Crestliner, and Lund, which target different types of boat users.
  • Recreational Boating Market: The marine market has seen a fluctuating demand lately. The COVID pandemic caused a boom, but since then demand has cooled off. The market seems to be moving to more stable rates again, with underlying growth.
  • Electrification: A growing trend in the industry is the electrification of boats and engines. With concerns regarding emissions and the increase in efficiency from electric boats, there is a slow shift toward the electrification.
  • Digitalization: There has been an increase in incorporating digital solutions in boating and marine systems, enhancing the customer experience and providing data for better management of the boat.
  • Sustainability: Consumers and regulatory authorities are pushing for more environmentally friendly practices in manufacturing and operation.
  • Geopolitical and Economic Risks: Global supply chains disruptions, inflation, changes in monetary policies, changes in trade policies, conflicts and rising recession fears create issues in many industries including the marine business.

Competitive Landscape

  • The marine industry is highly competitive, with many companies vying for market share. The main competitors are global marine manufacturers as well as local players.
  • Major competitors include Yamaha, Suzuki, and BRP (Bombardier Recreational Products) in the engine segment, and boat manufacturers like Malibu Boats and Mastercraft. The competition for boat parts and accessories is fragmented.

What Makes Brunswick Different

  • Branded Portfolio: Strong brands in all parts of the business. The company owns many leading marine brands that are very old and well-regarded by consumers.
  • Leading Propulsion Brands: Mercury is a market leader in boat engines, allowing the company to innovate and stay ahead of its competitors.
  • Global Reach: A large global presence, which helps provide for diversification.
  • Vertical Integration: Brunswick integrates many parts of its businesses, from manufacturing, to selling, and distributing, providing a supply chain advantage and allowing for customization.
  • Advanced Technology: Continuous innovation to incorporate modern tech into existing products, and develop completely new products that provide new value propositions.
  • Focus on Sustainability: They have a clear focus on sustainability and are adapting their business to be more environmentally friendly.
  • Diversified Business Structure: The company has a wide range of products across several different segments, that helps it capture more value in the marine industry.

Financial Analysis

A quick review of the latest report shows that Brunswick is a company that is experiencing both benefits and challenges. Let’s dig deeper into the details:

1. Revenue:

  • Brunswick’s net sales increased by 3% in Q3 2023 compared to the prior year. However, when taking into account recent acquisitions, growth came in at 6%

  • Revenue growth has been somewhat uneven lately due to a fall in sales, in some categories, due to high inflation.

    • For the three months ended Sept 30, 2023 Propulsion sales were up by 5%, Parts and Accessories decreased by 4% and Boat sales fell by 20%.

  • It is clear that the main bulk of the increase in sales is from the Propulsion segment.

  • For the first nine months of 2023 Propulsion sales are up by 14%, while Parts and Accessories sales are up by 9%, and Boat sales are up by 2%, overall a 9% growth.

  • The strong growth in propulsion is offsetting the slow growth in the Boat segment.

2. Profitability:

  • Operating earnings in Q3 2023 was $197 million, down 35% compared to $303 million in Q3 2022.

  • The decrease in operating profits is mainly due to increases in labor and production costs, restructuring and impairment costs, and currency fluctuations.

  • Operating margins for the third quarter were reported at 13.9%, vs 17.5% last year. Adjusted operating margin is at 14.7%.

  • The operating margin is being pressured due to an increase in costs, but should return to more normal values in the future.

    • For the first nine months of 2023, adjusted operating earnings were $917.1 million, a 14.5% increase when compared to the $798.8 million figure for the same period in the prior year. The adjusted operating margin of 18.9% is 1.5% below last year’s figure.
  • Adjusted operating earnings are strong despite the increased pressures, highlighting the core efficiency in the business.

3. Balance Sheet:

  • Cash and cash equivalents stand at $468.3 million.
  • Total debt stands at $2.53 billion.
  • Inventory is at $1.59 billion.
  • Inventories have slightly decreased year over year, but they remain high as the company expects to fulfill current demand. This is a positive sign.

4. Cash Flow: * Net cash generated from operating activities is at $262 million for the first 9 months of 2023.

  • Cash flow generation continues to be very solid due to the positive performance of the business.

5. Other Financial Information: * Brunswick announced a $500 million share repurchase authorization that has been added to their existing plan.

  • Share repurchases show confidence in the company and its future results by the management. They also return value to shareholders.
    • Brunswick increased its full year guidance to 10.25-10.75, which is up from the previous 10.00-10.50.
  • The increase in guidance is a positive signal that the management expects to do better than previously expected.

Moat Rating: 2.5/5

Based on the above analysis, Brunswick has a moderate moat that earns a rating of 2.5 out of 5, with justification listed below:

Sources of Moat:

  • Strong Brands: Brunswick’s diverse brand portfolio offers a competitive advantage. The company has many strong brands in multiple industries. Brands such as Mercury Marine are very strong.
  • Economies of Scale: As a major player in the marine market, the scale of its operations provides cost advantages. Due to high fixed costs in manufacturing engines and boats, there are significant economies of scale for large players like Brunswick.
  • Distribution Networks: The extensive network of dealers and distributors is hard to replicate and provides Brunswick with a sustainable edge, however with the rise of e-commerce, the value of distribution network is declining.
  • Switching Costs: Customers who buy products from brands like Mercury will continue to buy parts from them, due to the compatibility and quality of the products.
  • Unique Technology: A strong investment in R&D provides new technology and innovations that help secure a better advantage.

Weaknesses:

  • Cyclical Demand: The business is subject to the demand cycles of the marine market, which makes it unpredictable and vulnerable.
  • Commodity-Like Products: Though a premium can be charged, it is still very hard to differentiate between the products in terms of raw materials. The commodity type products might make it hard for Brunswick to keep an edge due to low switching costs.
  • Technological Disruption: Changing technologies like Electric Boats might displace and shrink their internal combustion engine businesses.

Legitimate Risks that could Harm the Moat and the Business

  • Economic Downturns: The cyclical nature of the industry means that a recession will cause reduced spending on discretionary items like boats, engines, and accessories.
  • High Inflation: A rise in the cost of raw materials may increase production costs and reduce profitability, thus affecting sales.
  • Supply Chain Disruptions: Disruptions in the global supply chains could hurt production and increase input costs.
  • Technological Disruption: The rise of electrical boats may damage the demand for their legacy products that require gasoline.
  • Competitive Actions: New companies that are able to compete or imitate some of Brunswick’s products might threaten its position in the future.
  • Legal and Regulatory Risks: Changes in local and international regulation may increase costs and change current profitability.

Business Resilience

  • Brands: The strong brands owned by Brunswick can help the company weather a downturn and prevent large drops in sales.
  • Diversification: A diverse portfolio of different types of boats, engines, parts, and accessories ensures they can weather adverse effects in any specific segment.
  • Financial Stability: Overall the company has shown strong profitability and consistent cash flow creation, that can allow for long term growth plans to continue.

Understandability: 2/5

Brunswick’s business is moderately complex and requires a good level of knowledge in the areas of manufacturing, retail, and distribution of marine-based products. Understanding the company fully would require more than basic analysis of their business.

  • The company operates in a rather niche market which makes it difficult to follow compared to other more popular markets.
  • It has multiple divisions that each operate in a different way, making analyzing its overall profitability a bit more complex.
  • The use of multiple different segments makes it hard to analyze a clear picture without significant time spent analyzing the details.

Balance Sheet Health: 4/5

Brunswick’s balance sheet is overall healthy. While the level of debt is relatively high, the company generates sufficient cash to handle the debt.

  • Positive cash generation means the business is very healthy and able to handle debt.
  • Strong profitability means that the business can use cash flow to increase its current position in the future.
  • A slight increase in inventories might mean increased production of goods, signaling increasing demand.
  • Debt is at relatively higher levels, which might indicate slightly higher risk profile but is also manageable with their current cash flows.

Overall, Brunswick is a company with a moderately defensible moat, as it has high brand recognition and is adapting its business to new trends in the market. However, it faces some threats due to its cyclical nature and the rise of competitors. The strong financial results, along with improving sales in its propulsion segment, are positives for the company and give good assurance to investors that the company is fundamentally sound and has good long term potential. However, a deeper dive into the balance sheets and an understanding of all its segments is important to make a clear judgement about investing in the company.