Thursday, April 29, 2010

Bet Against Brunswick

Everyone likes a ten-bagger and speculators have become giddy over the future prospects of Brunswick. The company was being given away at about $2 twelve months ago. Today it was up 27% to $22.69. Quarterly earnings handily beat analysts' expectations, but the company still lost .15 cents per share or $13 million. BC doesn't plan to make money in 2010 and is hopeful it can return to profitability in 2011.

Revenue is running about 1/2 of its 2007 level, but it did grow quarter over quarter for the first time in several years. Like housing, since the boating/recreation industry was also supercharged with home equity funny money, former revenue levels aren't coming back for a decade. The company is forecasting that industry retail sales will decline 20% this year and sales at BC are reflecting that pace in January and February. March was much better at the wholesale level, but the company is cautiously optimistic about the boating/marine outlook.

In 2007 when the company recorded sales of $5.7 billion, they dropped $111 million to the bottom line, or 2 percent. Analysts are forecasting sales of 3.7 B for 2011 and earnings of 2 cents per share. With 90 million shares outstanding, that $.02 is net income of about $1.8M. Not the stuff of legitimate ten-baggers. If by a miracle they were to get back to the 2007 earnings level of $100M, today's price would still be valuing BC at almost 20 X peak earnings. Management isn't even close to thinking about returning to peak earnings. But speculators and financial illiterates have become devotees.

Their marine business may be seeing some uptick in business with replacement mercury engines, but all 16 boat lines have to be suffering. My marina and reports from the lake of the Ozarks say that sales are slim as they have to compete with repo boats and inventories are slimmer as floorplan financing is difficult to obtain and afford. In exercise equipment, most individual sales are New Year related and health club chains have cut back new openings-not a lot of growth potential here. Pool tables flourished with easy home equity financing and newly purchased McMansions. We know the state of real estate. Finally bowling isn't a hot market, but may be the best BC has available to it at present. The more I talk about their prospects, the more I consider increasing my bet!

The last over-valued company that I wrote about, Valmont, was a well run, solid operation that had just run too far. I never did sell any shares short as the upward momentum was too great and the company too good. BC may have momentum, and that can be dangerous and costly, but it isn't a great company. It has about $900M of debt and, even after significant cost cutting, doesn't have the revenues to start making money. I'm not predicting bankruptcy, but I don't think the market should be valuing it, today, at 20 X peak earnings when those earnings are years away. The price may run further, but it isn't sustainable.

This afternoon I sold BC short and intend to sell some more, especially if it continues to run. There isn't a big dividend involved so the margin interest should be easily covered assuming I'm correct. Additionally, if I'm wrong and the market takes it upward then the rest of my long positions will do well, reduced by the BC short. If it tanks, by itself or with a market swoon, the gain will soften the pain of the decrease in value of my stock ownership.

The world is starting to understand that government debt is a huge problem and that realization can't end well. The swoon yesterday, on big volume, shows that there are lots of very, very nervous investors that are playing a game of chicken or musical chairs. Fear in the government arena will negatively affect the equity markets. All of those ten baggers are at significant risk.

No one go out and buy an exercise bike, new SeaRay, or open a bowling alley. It's okay to bowl a few frames, I won't be mad.

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