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inside the market

The S&P/TSX composite index is trading at a price-to-earnings multiple of 18 times the 2016 consensus forecast and 15 times the 2017 consensus estimate – not inexpensive valuations. For investors searching for value, it can be tough to find. Discussed below is an undervalued stock with momentum anticipated to build in the second half of the year – BRP Inc.

The company

BRP manufactures and markets power-sports vehicles and propulsion systems with products such as roadsters, all-terrain vehicles, snowmobiles and personal watercraft. The company has strong brand awareness with brands such as Ski-Doo, Sea-Doo, Can-Am and Lynx. In terms of geographical revenue breakdown, in fiscal 2016, ended Jan. 31, 51 per cent of its revenue was from the United States, 31 per cent was international and 18 per cent was from Canada. Last fiscal year, U.S. revenue grew by 18 per cent year-over-year, international revenue expanded 4 per cent, while Canadian revenue contracted 4 per cent from the year before, negatively affected by weak economic conditions in Western Canada as well as warm weather conditions and lack of snow this past winter.

Operationally, despite the competitive and challenging market conditions, the company managed to end fiscal 2016 on a positive note, and the outlook for fiscal 2017 looks promising.

On March 18, before the market opened, the company reported fourth-quarter fiscal 2016 results that exceeded the Street's expectations, sending the stock soaring by 18 per cent that day. Earnings before interest, taxes, depreciation and amortization (EBITDA) were $173.9-million, compared with the consensus estimate of $161-million. Earnings per share (EPS) were 75 cents, well ahead of the Street's forecast of 69 cents.

For the 2016 full fiscal year, revenue increased 9 per cent year-over-year, EBITDA rose 9 per cent and earnings per share climbed 4 per cent. The company expanded its dealer network by 105, exceeding its target of adding between 75 and 85 new dealers.

Looking forward to fiscal 2017, management anticipates it will add between 45 and 55 new North American power-sports dealers – helping the company expand its sales. Growth is also being driven by product launches through the innovation of existing product lines as well as the introduction of new products. Management is forecasting overall revenue to grow between 4 per cent and 8 per cent. The outlook is encouraging; however, given the seasonality of the business and timing of new launches, earnings will be significantly shifted to the second half of the year.

One concern to highlight is the power-sports industry. In January, BRP's competitor, Polaris Industries Inc. (PII- NYSE), provided a cautious 2016 outlook, noting weak demand for power-sports products and uncertain economic conditions. Management at Polaris anticipates sales will range from a decline of 2 per cent to a slight gain of 3 per cent. Competition could be aggressive given the challenging market conditions.

Returning capital to shareholders

The company does not pay its shareholders a dividend, remaining focused on expanding the business. However, it has been actively repurchasing shares. Last year, the company bought back more than 3.7 million shares.

Valuation

This stock is trading at a price-to-earnings (P/E) multiple under 10 times the consensus fiscal 2018 estimate, below its historical average multiple of over 13 times, since the stock began trading in May, 2013. BRP is trading at an enterprise-value-to-EBITDA multiple of six times the consensus fiscal 2018 estimate – again, well below its historical average.

In addition, looking at its valuation relative to its peer, Polaris, there is a steep discount between BRP and Polaris.

Analysts' recommendations

According to Bloomberg, there are 12 "buy" recommendations, one "neutral" or "hold" recommendation, and there are no "sell" recommendations. The average one-year price target is $25.36, suggesting the share price may appreciate by 27 per cent. The majority of price targets are concentrated between $23 and $28.

The consensus EBITDA estimate is $497-million in fiscal 2017, up from $460-million reported in fiscal 2016, and anticipated to rise to $532-million in fiscal 2018. The consensus EPS estimate is $1.79 in fiscal 2017, up from $1.71 reported in fiscal 2016, and forecast to increase to $2.04 in fiscal 2018. Management is forecasting EPS of between $1.75 and $1.85 in fiscal 2017.

Chart watch

The stock has overhead resistance at around $20, then at $22, and after that near $23, which is close to its 200-day moving average. There is downside support around $17, then at $16.40, its 50-day moving average.

The bottom line

I recommend accumulating shares with a staggered approach, especially if the share price drifts back down to the high teens, an area where downside risk is rather limited.

I strongly encourage readers to consult a financial adviser, and to do their own proper due diligence before taking any investment action.