BRP Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

BRP Inc. is a global leader in the design, development, manufacturing, distribution, and marketing of powersports vehicles and propulsion systems, with a focus on creating unique and thrilling experiences for its customers.

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.

BRP operates in a competitive and cyclical industry, with a business model that spans from designing, manufacturing and distributing power sport vehicles to engines and related services. The “moat” here refers to the company’s capacity to maintain its competitive edge against rivals. We evaluate this capacity using several criteria: sustainable competitive advantages, legitimate risks and business resilience.

Moat Analysis: 2/5

BRP’s moat is relatively narrow, primarily stemming from a combination of brand reputation, its strong dealership network, and the scale and efficiency of its manufacturing processes. However, this moat is not impenetrable. Here’s why a rating of 2 out of 5:

  • Brand Reputation: BRP’s brands like Ski-Doo, Sea-Doo, Can-Am, and Rotax hold considerable recognition and loyalty among powersports enthusiasts, creating a degree of pricing power and repeat purchases. However, other major players like Polaris, Yamaha, and Honda also maintain strong brands, making this advantage less exclusive.
  • Dealer Network: BRP has established a robust global distribution network with a large network of authorized dealers offering service and support, creating customer loyalty and making it hard for competitors to quickly establish a comparable reach. However, this network also creates friction when entering new markets or attempting to gain market share.
  • Scale and Efficiency: BRP leverages its scale and manufacturing expertise to achieve certain cost efficiencies that competitors may find hard to replicate, giving them some cost advantages. However, this is not unique to BRP, with competitors adopting similar manufacturing processes. Also, new entrants could outsmart the old incumbents with more modern techniques.
  • Switching Costs: For most customers, switching to other brands isn’t too costly, as there is minimal switching cost (except maybe some compatibility issues with accessories). This makes it easier for competition to erode BRP’s customer base.
  • Network Effects: None of BRP’s businesses have any network effects.
  • Intangible Assets: While BRP has a strong brand, the products, though innovative, are not fully protected by patents and competitors can use these ideas to make their own products, which limits BRP’s moat.

Legitimate Risks That Could Harm the Moat

BRP’s moat is vulnerable to a number of external and internal factors that could severely impact its future performance and destroy its moat: 1. Competitive Pressure and Changing Industry Landscape: The powersports industry is competitive and prone to quick technological advancements, customer preferences shift, and new entrants could disrupt the industry. It will be difficult for BRP to maintain its moat against competitors. 2. Cyclical Demand: BRP’s sales are highly sensitive to economic cycles and consumer discretionary spending. In recessionary periods, consumer demand for its products may fall sharply, hurting revenues and profitability. 3. Dependence on a Limited Number of Key Brands: BRP relies heavily on a few key brands and their performance, and this dependence makes it vulnerable to brand erosion or shifts in consumer preferences. 4. Supply Chain Disruptions and Raw Materials: BRP relies on a global supply chain. Disruptions in the supply of raw materials can lead to production inefficiencies and higher costs. 5. Financial Stability of Dealers: A significant part of BRP’s sales depend on the health and stability of its dealerships and these dealers have a lot of risk in their own balance sheets. If dealers have financial issues that will directly affect BRP’s sales volume and growth. 6. Geopolitical Risks: With its worldwide presence, the company is vulnerable to political and social uncertainties, like civil unrests, war, and unexpected changes in trade regulation, which could significantly affect supply chain and profitability. 7. Regulatory Risk: New regulations and environmental and emission compliance can lead to more costs for BRP, and change product design, and limit their sale to certain markets.

Business Resilience

BRP exhibits a moderate level of resilience due to its brand strength and global presence.

  • Brand Loyalty: As highlighted, BRP has a solid base of customers who prefer its products, giving it some leverage during times of crises. Also, there is a large secondary market for their products, meaning that demand for their product will persist even if their sales are weak.
  • Diverse Revenue Streams: A broad portfolio of products and a global presence, to some extent, protects BRP from disruptions in any one category or market.
  • Experienced Management Team: BRP has an experienced team that has proven over the years that they can maneuver through crises like the COVID pandemic and the 2008 financial crisis, making them likely to react to issues swiftly.

Despite these aspects, the cyclical nature of the business and strong competition make resilience difficult. If the business environment becomes tough, the company would be forced to take more drastic actions. Also, since most sales are from discretionary spending, that means that if consumers have less money the company will face some challenges.

Detailed Business Explanation

BRP operates in the recreational vehicle (powersports) industry, focusing on the design, manufacture, distribution, and marketing of:

  • Year-Round Products: Snowmobiles (Ski-Doo), all-terrain vehicles (ATVs), side-by-side vehicles (Can-Am), and associated parts, accessories and clothing.
  • Seasonal Products: Personal watercraft (Sea-Doo), jet boats (Sea-Doo), and related products.
  • Propulsion Systems: Engines (Rotax) used for their products and other manufacturers, karts, aircraft, and snow vehicles.

BRP does not only manufacture or sell vehicles but also creates a unique ecosystem for each of them, making the customer experience a higher quality.

Revenue Distribution:

  • The company’s geographical distribution is well diversified with the USA being the biggest market. Other important markets are Canada, Europe, and Australia.
  • By type of product, BRP receives most of their income from the sale of vehicles with a lower margin and higher revenue contribution, while they make a higher margin selling parts, accessories, and clothing related to their vehicles.
  • BRP has a very unique ability to leverage their product portfolio by putting their components in many different vehicles, for example the Rotax engines are in all sorts of small vehicles including boats, jet skis and small aircraft.

Industry Trends:

  • The powersports industry is closely tied to economic cycles and consumer disposable income, as we pointed out before. Periods of prosperity are usually associated with increased revenue, while recessionary periods lead to reduction of sales.
  • Industry growth is also dependent on innovation, with new features, safety regulations, and design improvements driving sales volume.
  • BRP is also seeing the growth of electric models and is focusing on moving their R&D to electrify the current portfolio.
  • In certain industries, there is more concentration, for example, in the jet ski industry, there are not many players and most of the sales go to those established players, making it hard for new players to enter the market.

Margins:

  • Profit margins vary by product type. Vehicles are high sales with low margins, but parts and accessories, have higher margins. There are also differences in margins by territory.
  • Higher production costs and supply chain disruptions can negatively impact gross margins. In recent earnings call, management mentioned that they expect the supply chain situation to ease by the end of 2024.
  • The company has always kept prices relatively low compared to the competitors. They justify this by producing more volume. The management has indicated that they will start raising prices in the coming year, which might help them improve margins.

Competitive Landscape:

  • BRP operates in a very competitive sector with many well-established brands. BRP’s main competitors are Polaris, Yamaha, Arctic Cat, and Honda. There are also new entrants trying to enter the sector, both international and domestic.
  • Competitors also include local manufacturers that can benefit from government regulations, for example, in China there are few regulations around the emission of smaller engines, which allows many local manufacturers to dominate. Also in Europe and some parts of North America, electric vehicles are gaining prominence and it will be essential for BRP to pivot to this new area.
  • Due to high competition and the lack of product differentiation, the price is an important factor in purchase decisions for the consumer. To gain market share, competitors may choose to lower prices or add more features for the same price, which decreases profitability for all.

What Makes BRP Different:

  • BRP focuses primarily on the recreational market with a lot of innovation and research and development being key in their process.
  • They have a vertically integrated supply chain with their Rotax engines, which ensures high-quality products. They also leverage this technology by putting their products in other industries and having multiple revenue sources.
  • BRP is focusing on sustainable production practices with electrification, and use of recycled and renewable materials to stay relevant in the future.
  • The company is focusing on making their products not only high-performance but also fun, accessible and easy to maintain, making them suitable for a broader audience. This may also help them get newer and younger customers.

Financial Analysis:

BRP’s financial performance can be summarized as follows:

  • Revenues: BRP has consistently seen growth in sales figures year after year and has managed to increase them steadily.
  • Margins: As we noted previously, gross profit margins have fluctuated, but management is working to control costs. The company’s recent actions indicate that they have had success in this aspect, with margins stabilizing and expected to improve by end of 2024.
  • Debt: The company currently has a lot of debt on their balance sheet, as a result of acquisitions and expansion plans. They are trying to lower the debt to equity ratio by paying down debt.
  • Cash Flow: The company has traditionally had enough free cash flow, though, as highlighted before, this may suffer in times of crises or recession.
  • Stock Price and Investor Returns: While BRP has performed better than S&P average over a 10 year period, share price is still quite volatile, which may present an issue for risk-averse investors.

Management is bullish about the future, claiming that their new products will drive strong revenue and profits in the coming years.

Recent Concerns/Controversies/Problems

BRP has faced some challenges over the past few years:

  • Supply chain disruptions: These supply chain disruptions caused by the pandemic have led to high material costs and lower sales volume. The company has stated in earnings calls that they have been trying to mitigate this, with expectation of improvements by the end of 2024.
  • Economic downturns: Recessions will reduce demand for their products. BRP has a lot of manufacturing flexibility that allows them to shift and cut production when demand declines. Also BRP is working on increasing product penetration and gaining market share to offset the impact of economic downturns.
  • High Debt: The company has a high debt to equity ratio, making them vulnerable to a lot of financial risk. BRP stated that they are working on deleveraging by aggressively paying down debt over the next few years.
  • Inflation: There is a risk of rising prices, both raw materials and labor costs, putting downward pressure on margins.

Understandability Rating: 2/5

BRP’s business is fairly complex. While their products are quite easy to understand, the intricacies of their business operations, supply chain, market competition, and financial statement, especially the interaction between various businesses, are difficult to grasp for someone without much experience. Here’s why a 2 out of 5:

  • Product Knowledge: BRP makes a lot of products, which, if you don’t have a lot of product knowledge, can cause confusion.
  • Accounting Complexity: BRP’s accounting is very complex with a lot of consolidation, amortization of goodwill, asset valuation, debt management, revenue recognition from complex sales models, making it hard to grasp the profitability of the business.
  • Global Business Model: BRP operates on a global scale with different markets with different rules and regulations. Their financials are presented in USD, but all numbers need to be adjusted for local markets. It is necessary to be aware of the global economy to analyze the business properly.
  • Competition: The powersport industry is a competitive one, and new entrants, innovative business models, and shifts in customer preferences make it a hard to follow sector.
  • Cyclical Demand: Due to discretionary spending being the driver of BRP’s sales volume, it makes analyzing the industry unpredictable since it is highly susceptible to external forces.

Balance Sheet Health Rating: 3/5

BRP’s balance sheet is moderately healthy. While it has assets and is continuing to have revenue growth and profitability, its high debt is worrisome. Here’s why it’s a 3 out of 5:

  • Debt Levels: The company has a lot of debt as a result of past acquisitions and expansions. A high debt levels makes them vulnerable to high interest rate environments or decreased revenue, reducing its resilience.
  • Asset Quality: BRP’s business relies on the production of physical assets, like parts, raw materials, and inventory, which have a tangible value, and can provide some cushion for the company in the face of poor financial results. However, these tangible assets are also subject to market and prices, and could lose significant value. They also have goodwill from past acquisitions that could be a potential impairment risk.
  • Cash Position: BRP has been generating enough cash to maintain operations and has been able to cover its obligations. While they do need to focus on deleveraging in the coming years, they are at least in a good cash position for that.
  • Working Capital Management: A significant amount of BRP’s finances are in working capital and the ability to manage the assets and liabilities will ensure that they don’t have too much cash locked up.
  • Financial Covenants: Some of the debt that BRP has, has covenants, which the business is legally obligated to follow. Breaching these could be disastrous for the company. Therefore it is necessary to keep a watch on those covenant restrictions.

In summary, while BRP has some strengths that offer competitive advantages, like their brand, dealer network and scale, their business still remains vulnerable to competition, high debt, supply chain disruptions, economic volatility, and changing consumer preferences. They are a good company to consider, but due to the intricacies, cyclicality, and debt they should be approached with caution.