Leisure company Brunswick (NYSE:BC) announced fourth-quarter earnings Jan. 26, 2012 and they were a marked improvement year-over-year. Still a long way from its heyday of 2004-2006, the company is slowly pulling itself up off the mat. While its future looks a little brighter than it has in some time, I'll look at the pros and cons of an investment in Brunswick. (For more, see Earning Forecasts: A Primer.)






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Pros



Brunswick's full-year operating income in 2011 was $192.4 million, significantly higher than the $16.3 million it achieved in 2010. In terms of operating income, it hasn't generated this kind of profit since 2006, when it earned $341 million on $5.7 billion in revenue and an operating margin of 6%. In 2011, its operating margin was 5.1%, just 90 basis points less. Another year of profitability will likely drive margins above those in 2006. Brunswick's market cap at the end of 2006 was $2.9 billion, $1 billion higher than today. There is certainly upside potential with continued improvement.







The fourth quarter saw revenues increase 8% to $789.1 million, while its operating loss was 76% less at $18.1 million. On a diluted earnings per share basis, it lost 30 cents, compared to a loss of 94 cents in the fourth quarter of 2010. For all of 2011, its adjusted diluted earnings per share was $1.17 compared to a loss of 46 cents in 2010. The last time it made more than a dollar in earnings was 2007, when it made $1.24 per share on $5.7 billion in revenue. One more piece of evidence that its business is getting better.







For those who don't know much about Brunswick, it's divided into four reportable segments, with the lion's share of revenue generated from its marine engine and boat businesses, which delivered 74.4% of overall revenue in 2011, about the same as in 2010. Vital to its future success, the marine businesses generated $148.6 million in operating income in 2011, a vast improvement over the paltry $1.4 million achieved in 2010.

To give you an idea how important the marine division is to the business, let's go back to 2004 when its market cap was at an all-time high of $4.8 billion. At the time, its operating income from the marine businesses was $392.6 million with a 9.3% operating margin. Not only did they generate 50% more revenue, but they did so with an operating margin 400 basis points higher. That's how you get a valuation nearing $5 billion. It's going to take a better economy and another two years of improvements to get anywhere near the margins achieved in 2004, but it's doable. (To know more about income statements, read Understanding The Income Statement.)






Brunswick and Peers




Company


EV/EBITDA


Brunswick


7.47


Polaris Industries (NYSE:PII)


10.14


Arctic Cat (Nasdaq:ACAT)


10.4


Johnson Outdoors (Nasdaq:JOUT)


5.55


Winnebago (NYSE:WGO)


14.92








Cons



The boat business, despite the progress that's been made the last two years, is still a money loser. Since 2007, it's racked up $1.3 billion in operating losses. Even if it gets returns to the operating margins of 2004, it will take about eight years to earn back all that money. The money's essentially been flushed down the toilet. In a past article in 2010, I advocated that the company sell its boat business, primarily because the return on assets has never been that good. However, the company's whittled the boat assets down to less than $400 million, making a sale nowhere near as urgent. At this point, it's probably better to turn a profit and then explore its options.







Despite all the good news, Brunswick still only expects to make between $1.20 and $1.50 in diluted earnings per share in 2012. That's anywhere from no growth to a 30% increase; a big gap. Clearly, there's still plenty of economic headwinds facing the company. If you're an impatient investor, this kind of outlook shouldn't inspire you to buy its stock. But if you've got some patience, its guidance isn't that bad.







The Bottom Line



In August 2009, Brunswick looked like a great investment for those with a three- to five-year horizon. At the time, its stock was trading around $9. Today, it's over $21. Looking ahead, it doesn't seem that much has changed. If you can hold for the long-term, Brunswick continues to be a great buy. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)






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At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.

Tickers in this Article: BC, PII, ACAT, JOUT, WGO

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