Stock Analysis: BRP

Bombardier Recreational Products (BRP) (TSX:DOO) can trace its beginnings to 1937 when J.A. Bombardier was awarded a patent for a new kind of vehicle he developed in his garage. It could travel on snow.

A second model came in 1941, and the company was born shortly thereafter. They launched the Ski-Doo in 1959, and followed that up with inventing the Sea-Doo in 1968. The company has since made inroads in other parts of the recreational vehicle market, including entering the ATV world and introducing a line of three-wheeled road bikes.

In 2003 it was spun off of its parent, the much larger (at the time, anyway), Bombardier company. It spent a few years owned by private equity before having an IPO in 2013 and eventually graduating onto the NASDAQ just a few years ago.

These days, the company’s brands include Ski-Doo (snowmobiles), Sea-Doo (basically a snowmobile on water), Can-Am (motorcycles/ATVs), Lynx (European snowmobiles), Rotax (engines), Manitou, Alumacraft, and Telwater (boats). It faces competition in each of these market segments, but overall it is a powerhouse with many top brands under one roof.

I’ve also covered BRP before on this here Substack. In a now-deleted post (because it was a time sensitive idea only), I talked about the company’s offer to buyback $700 million of its own shares back in July. Shares were trading at around $95 back then, with the tender offer coming in the range of $94 to $113. Like a lot of these tender offers, there was an “odd lot” provision, which basically means you don’t get pro-rated on the tender offer if you’re trying to sell less than 100 shares.

The idea was simple. I bought DOO.to at $95, and tendered at $105, hoping for the approximately $1,000 upside. The thought was if I missed out, I’d own a high quality company at a reasonable valuation. And if I managed to guess the tender offer right, I’d make a $990 profit (on 99 shares, obvs), in just a couple weeks. The tender offer ended up maxing out at $103.50, which was excruciatingly close.

It took just a couple weeks after that for the trade to work out in my favour. The stock spiked to $110 and I bolted, locking in some decent short-term profits. The trade worked. It just didn’t work out quite as I planned.

(Fun fact: I keep a little cash in my TFSA for these arbitrage situations. It’s the perfect account for doing stuff like that. There are a few each year that pique my interest)

I’m not just familiar with BRP because of the tender offer. I’ve been paying attention to the stock on and off for years, mostly because of this price chart.

Besides being a massive winner since its IPO (although, as you can see, it took a little while to get going), the chart also reveals something else I found interesting. BRP has had many major stumbles over the years. Each of those stumbles ended up being a pretty good buying opportunity. We’re currently in the midst of the latest stumble. Is it a buying opportunity like the last ones? Let’s take a closer look.

(Sign up to get Uproar Capital in your inbox and never miss another post again!)

The latest

Everyone talked about how Zoom and Shopify and all the other tech names were COVID winners, but BRP is also emerging from the pandemic in pretty solid shape.

In a world where people couldn’t gather indoors, they took to nature. Folks walked more, even if it was just around the neighbourhood. They camped. They picnicked. They built decks and outdoor space so they could spend time in the yard. And they bought a lot of recreational products.

Unlike some of the other COVID winners, BRP’s success was a continuation of strong growth it set in motion a while ago. The company has consistently grown the top and bottom lines over the last decade, and especially in the last five years.

In the year ending Jan 31, 2017, BRP had $4.17B in revenues and earned $2.24 per share in earnings. Both have steadily marched upwards since. Over its last twelve months, BRP has generated $7.12B in revenue and earnings increased to nearly $10 per share. Granted, the per share earnings were buoyed by multiple tender offers (which decreased share count by about 27 million shares, or more than 20% of the float), but those are still consistent longer-term results.

One trend I really like is the company’s increasing profit margins, which has really helped increase the bottom line. Gross margins have increased from 24% to nearly 30% over the last handful of years. I’d expect that to normalize in the 27-28% range, which is excellent when compared to more mainstream auto companies. It also compares fairly well to Harley Davidson, although HOG’s gross margins are closer to 35%.

Analysts continue to be bullish, too. Revenue is expected to grow to $8.8B in 2022 and $9.6B in 2023. Earnings per share are expected to surpass $10 in 2022 and $11 in 2023. BRP has already issued 2022 guidance that largely matches analyst expectations.

As I write this, shares trade hands for just over $90 each. Or less than 9x forward earnings. That’s cheap.

Typically, a stock priced at 9x forward earnings is a shrinking business, something the market wants no part of. BRP is the exact opposite. It’s growing revenues, profits, and even profit margins. It is making a big effort to give back to shareholders through buybacks. I covered this last time, but let’s take a closer look at BRP’s huge buybacks over the last few years.

Why’s the stock down?

I’m pretty comfortable with BRP’s long-term future. Its moat is solid, especially in snowmobiles, SeaDoos, and in the motorsports segment. If I was someone interested in motorbikes, I would choose a three-wheeled model. The company is also poised to release some interesting electric models. It should be much easier to convince people on the advantages of an electric ATV or SeaDoo than an electric car. Much cheaper, too.

If I’m so bullish, why’s the stock down?

Investors are worried about a few different things. High energy prices certainly don’t help. It doesn’t do many sales in Russia (less than 5% of its total revenues), but that part of the business took a hit. We’ve all heard of the supply chain issues plaguing the world, which will undoubtedly impact BRP. In fact, such issues already impacted business during BRP’s last fiscal year.

This all adds up to significant recession risk, especially when interest rates really start increasing in a big way. At least I think. I don’t really know much about macro.

Maybe higher interest rates screw up the financing of motorized toys too.

Let’s call the risk general business risk. Nothing excessive, in other words.

I also think the valuation is going to help limit downside. It already trades at just 9x forward earnings (or 10x trailing earnings). I doubt it’ll get much cheaper on that basis. It’ll show up on stock screeners and value guys will start getting involved.

One thing I’d like to see is a more serious dividend policy. The dividend is $0.13 per share each quarter, good enough for a yield of 0.57%. That ain’t much.

The bottom line

I almost feel like I didn’t really get into the weeds on this one, and perhaps I’m leaving a few stones uncovered. But not every idea has to be a complex one.

BRP’s thesis is simple. This is a good company trading at a very reasonable valuation because investors are worried about a recession. If a recession comes in 2022 or 2023, shares take a hit. If the economy continues to hum, you’ve got a company that trades at 9x forward earnings. It won’t be there for long.

Disclosure: Funds managed by the author are long BRP.