EUR 850.00 For Business Accounts Only

Morningstar | No Sign of Consumer Slowdown at Narrow-Moat BRP With Robust Top-Line Growth Slated for FY20

Although BRP's processes already incorporate lean operations, management has not slowed its cadence in pursuing manufacturing and product initiatives to improve the company's competitive positioning. BRP's articulated strategic priorities include growth, agility, and lean focus. With watercraft and all-terrain vehicle production in Mexico and supply closer to consumer demand, BRP will be able to capture incremental cost savings in its manufacturing processes, in our opinion. In addition, firmwide centers of expertise and excellence should enable BRP to manufacture more optimally, improving its utilization (with incremental capacity stemming from changes at the Juarez 2 plant), and bring new products to market more quickly, ensuring a continually relevant and in-demand product lineup. Because BRP is already exposed to many customer segments, we don’t see a material acquisition as necessary for expansion. However, we think entry into white-space categories and small acquisitions, particularly in parts, garments, and accessories as well as marine, are likely and could boost margins incrementally.BRP has recently moved its 2020 goal of CAD 3.50 in earnings per share up a year, as it has continued to improve gross margins and leverage selling, general, and administrative expenses on higher demand. With efforts to extract incremental manufacturing efficiency gains underway, we view moderate operating margin expansion as reasonable, given the ability to capitalize on lower freight and labor costs and improve asset utilization (long-term forecast EBIT margins of more than 11% are only about 1% lower than Polaris’ long-term margins), weighed down by slower secular demand. Our base case incorporates these gains, with EPS rising to CAD 3.58 in 2019 and revenue that grows to CAD 5.9 billion in 2020 (versus a CAD 6 billion target), as the pace of innovation at BRP persists. BRP's brand intangible asset and leading market share position result in competitive returns on invested capital and a narrow economic moat. With improvements to manufacturing process to add capacity and scale, we think BRP could also develop a cost advantage over time.