Amid all the negative headlines, there's still something good to say about Bombardier – as long as you remember what the "B" in BRP Inc. stands for.
Bombardier Recreational Products, as the company was known, split off from legacy Bombardier Inc. in 2003 when the Bombardier family purchased it in partnership with private investors. In 2013, the maker of Ski-Doos, Sea-Doos and other motorized fun stuff sold shares to the public and listed on the TSX.
With Bombardier's recent woes – the shares have dropped below the $2 mark – the family's stake in BRP of about $1-billion is now roughly double the value of its equity holdings in Bombardier.
The margin would be even greater had BRP held its June highs of nearly $30 a share. But investor worries about BRP's sales in Western Canada and general squeamishness about the sport vehicles sector have prompted a nearly 20-per-cent drop in the stock.
Unlike Bombardier's woes, however, BRP's decline seems a temporary one. Analysts agree – according to Bloomberg, 11 of 14 who cover the company have a buy rating, and the average target price of $31.45 represents a nearly 30 per cent gain over Friday's close of $24.24. Clearly, the suggestion for investors: The thing to do is to buy DOO.
Joseph-Armand Bombardier's first commercial invention was not a jet plane or train; it was a snowmobile that would serve the people isolated in winter in the rural villages of Quebec. From this, we have today's wide range of BRP motorized vehicles, from land (Can-Am ATVs and motorcycles) to sea (the top-selling Sea-Doo Spark and Evinrude boat motors) to snow (Ski-Doo and Lynx).
And yet, the lineup is not complete. BRP hasn't had a "side-by-side" land vehicle in the "utility" category, which targets farmers, ranchers and landowners who need off-road vehicles more for work than play. The "utility" category is nearly 60 per cent of the side-by-side market, BRP estimates.
At BRP's semi-annual dealer showcase in Nashville last month, the company revealed its solution: The Can-Am Defender SxS. Martin Landry of GMP Securities says the Defender lineup "generat[ed] most of the buzz" and dealers seemed pleased with the engine on the new SxS model.
"We believe that BRP is now much better equipped to compete with industry-leading Polaris in the important SxS segment," Mr. Landry says, with the potential to add dealers to its distribution system and take floor space away from other vehicle makers. "We believe that this new product lineup could bring back [earnings-per-share] growth rates into the double-digit range in the coming years." (Mr. Landry has a $31 target price.)
The short term, however, remains uncertain, contributing to the recent share price decline. BRP has maintained its guidance for sales growth of 5 per cent to 9 per cent in the fiscal year that ends in January. The figures imply a slowing rate, as first-half revenue was up 11 per cent year-over-year, Desjardins Securities analyst Benoit Poirier notes.
Western Canada is a big part of the problem, as sales there declined nearly 25 per cent in the second quarter from the soft economy. (BRP gets 20 per cent of its annual sales from Canada, Mr. Poirier says, but doesn't specify how much come from each region or province.) The company is also cautious about the sales outlooks in Latin America and Russia because of political instability, with Russia being a key second-half market because of snowmobile sales. Plus, there's a "fiercer competitive landscape" in the United States, says Mr. Poirier.
Despite this, he says, he believes BRP will benefit from its new products, a better U.S. market in the medium term and an expansion of profit margins from expanding its production in Mexico. (His target price is $33.)
Gregory Badishkanian of Citigroup, who has a $32 target price, sees 2016 as a "positive inflection year" for BRP. In analyst-speak, that means things will turn for the better. And, he says, "given negative investor sentiment combined with a potential positive catalyst in 2016, BRP is one of our favourite names."
The best name on the TSX, in fact, with the word "Bombardier" in it.
David Milstead