BRP’s second-quarter results in September were disappointing, but also included costs associated with launching new products such as its Spyder three-wheeled motorcycle.
BRP Inc. is in good shape to redeem itself after a shaky start as a publicly traded company.
Investors put off by a couple of recent earnings misses by the Ski-Doo maker may want to reconsider the company's prospects of meeting lofty profit goals in the second half of the fiscal year, said Derek Dley, an analyst at Canaccord Genuity. "Management is confident and I think their earnings visibility in the back half of the year is quite strong. I think they're going to do it."
"If they come out and meet guidance, I think you have a rerating up to previous levels," Mr. Dley said. BRP releases earnings in December.
In 2003, Bombardier Inc. sold off its recreational products division, which made snowmobiles and boats.
The plan to take BRP public was scuttled by the 2008-09 financial meltdown and resulting global recession, which slashed a huge chunk of BRP's business.
In the ensuing years, the company cut its work force, increased research and development and diversified to international markets, before returning to the equity market last year.
The BRP initial public offering in May, 2013, was many times oversubscribed, closing on its first trading day 12 per cent higher than its IPO price of $21.50. High growth prospects and market leadership sent the stock to a high of $31.98 by March, 2014.
Then came a pair of earnings misses. BRP posted an unexpected fiscal fourth-quarter loss, in part due to economic uncertainty in Russia, its third-biggest market.
Meanwhile, last year's unusually cold winter, which turned into a cool spring, pinched sales of the company's summer vehicles, such as Sea-Doo watercraft. The stock declined by 11 per cent after the earnings announcement.
BRP disappointed investors again in September with its fiscal second-quarter results. The market then began to doubt the company's earnings forecasts for the rest of the year and pushed the share price down by another 14 per cent in the following weeks.
The stock, as of Friday's close of $24.33, sits 24 per cent off its peak.
While BRP may warrant a higher valuation relative to its peers, "given its strong potential for market share gains and healthy new product pipeline," Mr. Dley said, it now trades an enterprise value of 7.7 times estimated 2016 earnings before interest, taxes, depreciation and amortization (EBITDA), compared to a group average of 8.4 times.
"Investors will remain skeptical as to whether or not management will achieve its full-year guidance, as BRP will now need to derive about 80 per cent of its normalized EBITDA from [the second half of the year] to achieve its target," Benoit Poirier, analyst with Desjardins Capital Markets, said in a note.
That's a tall order, but one which management and several analysts think is feasible.
Results from the first half of the year included many costs associated with launching new products across its snowmobile, ATV, Evinrude engine, Spyder three-wheeled motorcycle and side-by-side vehicle product lines, Mr. Dley said.
Also, last winter produced a spike in snowmobile demand, and U.S. dealers ran out of inventory by mid-January. That is "supportive of the need for inventory restocking heading into this winter season," RBC analyst Steve Arthur said in a recent note.
This should help the company meet its guidance, which would require BRP to deliver second-half revenue growth of 14 per cent over the prior year and earnings growth of 54 per cent, Mr. Arthur said.
A strong third quarter would go a long way to easing the investor doubts that weigh on the stock, Mr. Dley said. He has a $33 target price and a "buy" rating on the stock. All but one of the 11 other analysts covering the stock also rate it a "buy," with an average target of $32.67.
The risk, of course, is that BRP fails to meet its profitability targets. "A miss would likely trigger further concern about the longer-term earnings power of the business," Mr. Arthur said.
Tim Shufelt