BRP Moderates Near-Term Shipment Outlook to Preserve Its Brand Intangible Asset

Senior Equity Analyst

Jaime M Katz

Fiscal 2024 (ending January) showed another year of positive sales growth, although the cadence of demand growth has slowed, crimped by macroeconomic headwinds. We contend this is a function of the cycle and expect that BRP's continued focus on its long-term product and operational priorities will allow it to maintain strong competitive positioning. BRP's strategic priorities focus on market share growth, lean operations, and cultivating an engaged workforce, all while honing in on evolving customer demands. With manufacturing facilities located near demand (for example, personal watercraft in Mexico) and timely spend to increase facility capacity as needed, BRP should continue to capture efficiencies from its plants. Firmwide centers of expertise and excellence allow BRP to manufacture optimally, improving utilization and allowing it to bring products to market quickly, ensuring a continually relevant and in-demand product lineup. Because BRP is exposed to many customer segments, we don’t believe acquisitions are required for expansion. However, we think entry into white-space categories (like motorcycles) and small acquisitions, particularly in parts and accessories or marine, are possible and could support growth.

While BRP will not reach its previously updated fiscal 2025 goals of CAD 12 billion-CAD 12.5 billion in sales and CAD 13.50-CAD 14.50 in EPS, it should arrive around its inital 2025 forecast offered in 2019, which included sales of CAD 9.5 billion and EPS of CAD 7.50. We believe the cyclical and weather-related issues, which account for a CAD 3.75 headwind, that BRP is facing are transitory, and that over time product innovation (for example, Project Ghost, which altered placement of outboard engines) will continue to drive consumer engagement. We forecast sales of CAD 9.3 billion and EPS of CAD 7.92 in fiscal 2025 in our base case, supported by BRP's innovation and leading market share position, which we believe signal a brand intangible asset. Due to improvements to the manufacturing process and scale, we believe BRP has also developed a cost edge. Together, these factors support competitive returns on invested capital and a wide economic moat.

Business Strategy & Outlook

We rate BRP's economic moat as wide, as we think performance at the business signals a brand intangible asset and a cost advantage. On the brand side, innovation has consistently won with consumers, thanks to healthy research and development spending, resulting in impressive market share metrics, which we don’t believe will recede. Additionally, the evolving sales composition of the enterprise, given the firm’s entrance into the boat manufacturing business (for example, with the purchase of Manitou in 2018) and exit from the boat engine business (Evinrude) in 2020, has generally elevated the return on product development costs, while lifting the perception and profitability of the enterprise. 

As evidence of BRP’s brand prowess, we look to its ability to capture industry leading market share. We posit much of the brand staying power is contingent upon perpetual spend on research and development to ensure the firm has a pipeline of compelling new products to entice its addressable market. We surmise BRP will spend around 4% on sales over the next five years on such efforts, which represents about CAD 430 million annually, in line with peers like wide-moat Polaris. Such efforts have allowed BRP to hold a solid leadership position (30% market share in side by sides) in the off-road market, alongside companies like Polaris and Honda (year-round products, including ATVs, constituted 52% of fiscal 2024 sales). And while the side-by-side market didn’t fully develop until the late 2000s, BRP has been able to garner share leadership there as well. Impressively, in ATVs, Can-Am's (BRP’s category brand) market share, has grown to an above-20% rate from a high-single-digit level over the past 10 years (more than double). This is as North American manufacturers have taken increasing share from Japanese OEMs and compares to Polaris’ consistent 30% share and Arctic Cat's low-single-digit share (down from a high-single-digit level), according to Powersports Business and our estimates. 

Not only has the firm been successful in capturing consumer interest in off-road products, but its brand has been a perpetual market share leader in personal watercraft (PWC) thanks to the best-in-class products offered. In this context, BRP’s market share has averaged north of 50% over the past decade, with management recently citing it has controlled more than 60% of the space. We surmise this prominence will remain, as PWC is a very consolidated industry, with only three key players. Due to the limited scale (the total market was only 140,000 units globally in 2023, according to the most recent data available from BRP), we don’t expect any new entrants will begin to operate, as utilization would be limited at best and returns for all operators would probably be diminished if demand were to be split further among manufacturers. While a new entrant could build a facility that is sized for demand, startup costs (building a facility, hiring workers, acquiring proper equipment) would probably prevent the endeavor from being economically sensible (even if it were able to carve out share gains), as payoff periods would be extensive.

Similar barriers to entry (limited global unit demand) benefit the firm’s presence in snowmobiles, where consumers continue to prefer the BRP brand for purchase. According to BRP, the company controlled around 60% of the market in 2023. This is from around 50% in the five years before the pandemic, a level we think BRP is likely to return toward as supply chain constraints ease across the industry (though still impressive, in our opinion). Like PWC, the industry is composed of only four manufacturers making up most units produced (along with Yamaha, Polaris, and Arctic Cat), placating concerns that share shifts will degrade any time soon, especially with BRP remaining dedicated to innovation in the category (and Yamaha has announced its exit from the industry). This aligns with our forecast for BRP’s sales to largely grow in line with industry growth of 3% through 2030 (according to Allied Market Research).

Quantitatively, brand resonance with consumers can be ascertained via pricing power, which ultimately surfaces in improving gross margin performance. BRP’s average gross margin over the last five years ending January 2024 was 25% (including the pandemic related bump in 2020-2022 where the metric averaged 25.8%), versus 24% in the five years prior, even as the firm has faced inflationary headwinds in both inputs and logistics costs. This metric is now slightly above wide-moat Polaris. We don’t think the well for gross margin gains is tapped out, with our forecast calling for a modest expansion annually to 25.6% in fiscal 2034, above the 24% the company averaged in the five years leading up to the pandemic. 

Additionally, we think the brand is supported thanks to BRP’s robust, 2,800 global location dealer network that has been built over the past five decades, supporting customer reach. These dealers will be instrumental in helping BRP tap into a growing total addressable market. For reference, in 2021-22, 30% of purchasers were new to the category (historically, this figure has run at less than 20%), a pattern that is unlikely to abate. From its own survey, BRP found that over the next 10 years, 30%-50% of new product owners are expected to be people that don’t currently own a powersports product and have not participated in the past decade. That should bring a significant number of potential repeat clients into the fold, offering more support for future product replacement and expansion growth (in subsequent purchases, clients have been increasing the amount of spend at BRP). 

Although most of these are not exclusive BRP dealers and BRP products share floor space with competitor offerings, we think new competitors would have to develop a high-volume business to garner any negotiating power with vendors and move significant inventory through the retail channel (which we view as unlikely). It would take some lead time to set up a new manufacturing facility, produce product and inventory, and have dealers commit to selling these new products. As such, we view BRP’s relationships with its distribution base as strong. Considering all of the aforementioned brand demand and given a still solid opportunity set for brand reach, we think BRP’s intangible assets should persist for more than 20 years.

Furthermore, as BRP’s sales and manufacturing processes have scaled, we think the firm has captured a cost advantage. BRP now has the ability to spread fixed costs over higher volumes, negotiate better with vendors, and manufacture more efficiently, with a factory footprint that is more competitive than in the past and a more favorable product mix (boats rather than marine engines). These factors have led to structurally higher operating margins and improving ROICs, which we don’t expect to recede. For reference, when we initially rated BRP as narrow moat in 2015, sales were less than half 2024 levels (CAD 3.8 billion in fiscal 2016 versus around CAD 10 billion in fiscal 2024). Initially, most of its sales stemmed from BRP’s year-round (38% of fiscal 2016 sales) and seasonal (36%) segments, categories which still comprise more than 80% of sales, implying interest in the legacy lines has not waned despite robust growth in its newest segment, marine. Impressively, both segments maintain a sound pulse on the consumer, with year-round sales rising 20% and seasonal sales climbing 15% on average over the past five years (significantly faster than average all-terrain vehicles (ATV)/off road vehicles (ORV) and personal watercraft (PWC) industry unit sales growth of 2% and 4%, respectively). But this growth hasn’t come at a cost. Over the same time frame, operating margins climbed 360 basis points to 13%, indicating the efficiency gains that have ensued. 

We partly attribute the profitable growth that has manifest to prudent changes to product exposure management has overseen. For one, BRP has expanded into marine, acquiring the Alumacraft and Manitou brands in 2018, which together generated about CAD 200 million in sales at time of purchase and have grown to represent sales of CAD 430 million in 2023 (4% of total). We think this segment offers BRP the opportunity for improved brand awareness and top-line growth--the firm previously expected the segment would climb to CAD 1 billion in sales by fiscal 2025, supported by innovation that leads to consumer interest and new entrants in the boating market (our estimate is around CAD 425 million, taking into consideration a tempering consumer sentiment). With BRP quantifying the global marine market at CAD 36 billion (2022), we believe BRP holds just a low-single-digit share of the overall marine market, and we think the boat business should continue to provide a lift to BRP’s brand visibility fueled by consumer-valued new products. Even if the marine business grows to just 5% of the total boat market through product expansions and acquisitions over time, it would represent a CAD 1.8 billion opportunity, and that’s with no growth considered for the total boat market. Admittedly, the lift in sales from boats was partially offset by the 2020 shuttering of its marine engine business (Evinrude), which contributed roughly CAD 400 million per year to sales. We found this move prudent given Evinrude’s underperformance relative to BRP’s other businesses, as the boat engine’s attempts to crack into the packaged segment in a meaningful way stalled, signaling that significant performance improvement initiatives would have had to be implemented to bring profitability of Evinrude up to company levels. Given the time and capital that would have to be allocated to such an effort, BRP chose to exit, rather than invest in, the line. 

Additionally, we posit having competitively located manufacturing facilities (close to demand, lower labor costs) now gives the company the ability to remain an efficient and low-cost competitor ahead. And we don’t believe the manufacturing gains can be easily replicated, given that the cost improvements achieved have been undertaken over more than 15 years. To start, in 2007, BRP had just one factory in Juarez, Mexico. Not until 2013 did the firm open further capacity in the region to capture cost advantages from labor expenses and speed to market, with the opening of its Queretaro facility, focused on the production of PWC. After that, the firm added extra capacity in Juarez (off-road vehicles) and Queretaro across multiple phases, which are not set for completion until 2024, when 75% of the firm’s products are expected to be produced in the region. With further capacity and product lines (motorcycles) set for production in Mexico beyond 2023, risk of stock outs or capacity bounds are less likely to occur. We think it would be highly unlikely that another competitor would enter the market, take enough share to warrant similar cost efficiencies, and have the operating structure to yield performance near BRP or Polaris levels over any reasonable time frame, given the already highly concentrated condition across the industry.

Moreover, a new entrant would have to have access to capital. To facilitate BRP’s production growth, capital expenditures averaged CAD 460 million over the last five years (6% of sales), up from averaging CAD 175 million from 2014-18, and we expect this figure to increase to around CAD 600 million over the next five years, positioning the firm to maximize utilization. For BRP, even with increased capital and operating expenditures, operating margins have climbed to 13% in 2024 from 9% in 2017, exhibiting impressive cost leverage. Moreover, we think the company’s cost controls mitigate cost headwinds as the brand expands into white space categories, like motorcycles, electric products, and new categories (for example, a new product like the Sea-Doo Switch), areas that leverage the existing knowledge base and manufacturing lines to facilitate growth. 

Over time, expenses should benefit from these factors, displaying the firm’s cost advantage, via lower spending on distribution costs as units ship efficientlygiven the manufacturing location in the Southwest, near demand); leveraging overhead expenses from rising shipments; and lower material, freight, and labor costs with the additional capacity coming online. Our longer-term forecast calls for BRP to generate operating margins of 12%, around our long-term operating margin forecast for Polaris, indicating that BRP has closed the gap on its closest wide moat competitor with respect to profit levels. 

Over the last five years, BRP has delivered ROICs including goodwill of 37%, significantly above our 10% weighted average cost of capital estimate. And we believe ongoing efforts to build out incremental manufacturing capacity and launch new products will allow ROICs to continue to outpace its cost of capital over a multidecade horizon, with our explicit forecast averaging 27% over the next decade.

Wide

Economic Moat

BRP Inc

BRP, Inc. is a holding company, which engages in the design, development, manufacture, distribution, and marketing of power sports vehicles and marine products. The firm operates through the Powersports and Marine segments. The Powersports segment includes Year-Round Products, Seasonal Products and Powersports PA&A and OEM Engines. The Marine segment includes outboard and jet boat engines, boats, and related PA&A and other services. Its brands include Ski-Doo, Lynx, Sea-Doo, Evinrude, Rotax, Can-Am, and Alumacraft. The company was founded on May 1, 2003 and is headquartered in Valcourt, Canada.

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BRP, Inc. is a holding company, which engages in the design, development, manufacture, distribution, and marketing of power sports vehicles and marine products. The firm operates through the Powersports and Marine segments. The Powersports segment includes year-round products, seasonal products and powersports PA&A and OEM Engines. The Marine segment includes outboard and jet boat engines, boats, and related PA&A and other services. Its brands include Ski-Doo, Lynx, Sea-Doo, Evinrude, Rotax, Can-Am, and Alumacraft. The company was founded on May 1, 2003 and is headquartered in Valcourt, Canada.

VALCOURT, Quebec, April  15, 2020  (GLOBE NEWSWIRE) -- BRP Inc. (TSX:DOO; NASDAQ:DOOO) has announced a series of additional measures in light of the COVID-19 pandemic. After slowing down and temporarily suspending manufacturing at all our powersports and marine operations sites around the world, we are taking additional actions, including cost-containment measures and changes in employee compensation to protect our financial flexibility and long-term growth.

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VALCOURT, Quebec, March  30, 2020  (GLOBE NEWSWIRE) -- BRP Inc. (TSX:DOO; NASDAQ:DOOO) has announced that, due to the rapid evolution of the COVID-19 situation, we are temporarily suspending or slowing down all our powersports and marine manufacturing operations around the world. These actions are being taken to allow us to evaluate and respond to the changing conditions, as well as to respect international health and safety recommendations in the face of the current crisis.

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CANCUN, Mexico, Feb.  13, 2020  (GLOBE NEWSWIRE) -- BRP (TSX: DOO; NASDAQ: DOOO) unveiled its latest Ski-Doo innovations during the company's three-day Club BRP event in Cancun, Mexico, attended by hundreds of Ski-Doo dealers. The star of the show was the 2021 Ski-Doo model year lineup, which is designed from the rider down to enable some of the most incredible adventures on the planet.

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JOHNSON VALLEY, Calif., Feb.  05, 2020  (GLOBE NEWSWIRE) -- In what’s becoming a trend in 2020, BRP (TSX: DOO; NASDAQ: DOOO) dominated the competition with its Can-Am Off-Road vehicles at the 2020 King of the Hammers event this past weekend. In addition to sweeping the podium, Can-Am vehicles crossed the finish line in eight of the top 10 positions.

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VALCOURT, Québec, Feb.  04, 2020  (GLOBE NEWSWIRE) -- BRP (TSX:DOO; NASDAQ:DOOO) announced today an amendment and extension of its existing U.S.$1,235.0 million term facility providing for the consolidation of the facility into a single tranche bearing interest at a rate of 200 basis points over LIBOR. This represents a reduction of 50 basis points for the portion of the term facility that had previously been outstanding under the U.S.$335 million tranche advanced in 2019, and the extension of the maturity of the term facility to May 2027.

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VALCOURT, Quebec, Jan.  17, 2020  (GLOBE NEWSWIRE) -- For the third consecutive year, BRP (TSX: DOO; NASDAQ: DOOO) outpaced the competition at the renowned Dakar Rally – the world’s toughest race – with its Can-Am Off-Road vehicles. In addition to winning the side-by-side vehicle category, Can-Am vehicles crossed the finish line in all of the top 20 positions, dominating the competition from start to finish.

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VALCOURT, Quebec, Jan.  13, 2020  (GLOBE NEWSWIRE) -- BRP (TSX:DOO; NASDAQ:DOOO) is launching the world’s first factory turbocharged two-stroke engine with an all-new Ski-Doo Summit 850 E-TEC Turbo snowmobile1. Designed from the rider down, this sled redefines mountain riding and demonstrates the brand’s obsession with providing the best possible riding experience. With its innovative new turbo technology, the Summit 850 E-TEC Turbo delivers impressive power constantly – without any loss – at altitudes of up to 8,000 feet (2,400 metres), something never before accomplished on a two-stroke factory sled.

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VALCOURT, Quebec, Dec.  16, 2019  (GLOBE NEWSWIRE) -- BRP Inc. (TSX: DOO; NASDAQ: DOOO) ("BRP" or the "Company") announced today the closing of the previously announced bought deal secondary offering pursuant to which Beaudier Inc. and 4338618 Canada Inc. (collectively, "Beaudier Group"), Bain Capital Luxembourg Investments S.à r.l. ("Bain") and other selling shareholders (collectively, the "Selling Shareholders") sold an aggregate of 5,000,000 subordinate voting shares of BRP at a purchase price of $61.17 per share for total gross proceeds of $305,850,000 to the Selling Shareholders.

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VALCOURT, Quebec, Dec.  10, 2019  (GLOBE NEWSWIRE) -- BRP Inc. (TSX: DOO) (NASDAQ: DOOO) (“BRP” or the “Company”) announced today that certain of its shareholders, including Beaudier Inc. and 4338618 Canada Inc. (collectively, “Beaudier Group”), and Bain Capital Luxembourg Investments S.à r.l. (“Bain”) (the “Selling Shareholders”), and the Company have entered into an agreement with an underwriting syndicate led by BMO Capital Markets, Citigroup and RBC Capital Markets to complete a secondary offering on a bought deal basis (the “Offering”). Under the agreement, the underwriters have agreed to purchase 5,000,000 subordinated voting shares of the Company at a purchase price of C$61.17 per subordinate voting share for total gross proceeds to the Selling Shareholders of C$305,850,000.

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VALCOURT, Quebec, Oct.  29, 2019  (GLOBE NEWSWIRE) -- BRP Inc. (TSX:DOO; NASDAQ:DOOO) will host a webcast from Florida on Tuesday, October 29, 2019 at 8:00 a.m. (ET). José Boisjoli, President and Chief Executive Officer, Sébastien Martel, Chief Financial Officer and other members of the management committee will discuss the business and BRP's five year-plan, and address questions from analysts and investors in the room.

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VALCOURT, Quebec, Oct.  21, 2019  (GLOBE NEWSWIRE) -- BRP Inc. (TSX:DOO; NASDAQ:DOOO) announced today that, in connection with its previously announced normal course issuer bid to purchase for cancellation up to 4,170,403 subordinate voting shares of BRP (the “NCIB”), it entered into an automatic share purchase plan (the “APP”) with a designated broker. This is intended to allow for the purchase of subordinate voting shares under the NCIB at times when BRP would ordinarily not be permitted to purchase shares due to regulatory restrictions or self-imposed blackout periods.

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VALCOURT, Quebec, Oct.  17, 2019  (GLOBE NEWSWIRE) -- BRP Inc. (TSX:DOO; NASDAQ:DOOO) will host a webcast from Florida on Tuesday, October 29, 2019 at 8:00 a.m. (ET). José Boisjoli, President and Chief Executive Officer, Sébastien Martel, Chief Financial Officer and other members of the management committee will discuss the business and BRP's five year-plan, and address questions from analysts and investors in the room.

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VALCOURT, Quebec, Sept.  26, 2019  (GLOBE NEWSWIRE) -- BRP (TSX:DOO; NASDAQ:DOOO) is proud to have been named among the 30 top performing stocks on the Toronto Stock Exchange (TSX) over a three-year period, earning a spot in the 2019 TSX30 program. BRP has experienced tremendous growth and more than doubled its stock price value1 since its introduction on the TSX in 2013.

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