Consumer stock BRP Inc. continues to earn record profits, pay higher dividends and buy back lots of its own shares.
We’ve added Valcourt, Quebec-based BRP Inc. (TSX—DOO) to our list of Key stocks. It’s a buy for long-term share price gains plus modest but growing dividends.
BRP describes itself as a “global leader in the world of powersport vehicles, propulsion systems and boats . . . includes Ski-Doo and Lynx snowmobiles, Sea-Doo watercraft, Can-Am on- and off-road vehicles, Alumacraft and Manitou boats, Evinrude and Rotax marine propulsion systems as well as Rotax engines for karts, motorcycles and recreational aircraft. We support our lines of product with a dedicated parts, accessories and clothing business . . . with annual sales of C$5.2 billion from over 120 countries.”
BRP is one Canadian manufacturing stock that successfully competes around the world. It generated only 16.1 per cent of last year’s revenue in Canada.
BRP is well diversified
BRP’s geographical diversification improves the stability of its earnings and cash flow. It generated 72 per cent of its revenue in North America; 18 per cent in Europe; seven per cent in the Asia-Pacific region; three per cent in South and Central America; and less than 0.2 per cent in Africa.
The diversification of BRP’s products offering also makes its earnings and cash flow more stable. In fiscal 2019, its revenue from year-round products totaled $2.241 billion. Revenue from seasonal products came to $1.804 billion. Powersports sales were $708 million. Marine sales were $492 million.
BRP profits and dividends continue to grow
BRP is generating growing earnings. In the year to January 31, 2020, it’s expected to earn a record $3.59 a share. This would work out to a healthy earnings gain of 15.8 per cent from last year, when it earned a record $3.10 a share. Next year, the company’s earnings are expected to go up by another 6.1 per cent, to a new record of $3.81 a share.
BRP rewards its shareholders. It introduced a quarterly dividend in fiscal 2018. That year, it raised its quarterly dividend from eight cents a share to nine cents a share. In fiscal 2019, the company increased its quarterly dividend to 10 cents a share. The yearly dividend of 40 cents a share yields a modest 1.03 per cent. But we expect the dividend to continue to grow along with BRP’s earnings.
BRP keeps renewing its share buyback program
BRP also rewards its shareholders through its share buyback programs, which it renews annually. In fiscal 2019, it spent $249 million to repurchase and cancel 3,625,271 of its subordinate voting shares. Now the company can buy back up to 4,170,403 shares until April Fool’s Day, 2020. As the share count falls, its earnings per share automatically rise.
Most of BRP’s earnings growth, however, comes from acquisitions and new product introductions. In fiscal 2019, for instance, it acquired Alumacraft Boat, a recreational boat manufacturer. BRP also acquired Triton Industries, which manufactures pontoons under the Manitou brand name.
On May 1, BRP agreed to acquire 80 per cent of the shares of Telwater. This company is Australia’s leading manufacturer of aluminum boats and trailers. Telwater manufactures more than 8,000 boats and 5,500 trailers a year at its Australian factory.
BRP can afford to make acquisitions
BRP president and chief executive officer José Boisjoli said: “This is one more piece of the puzzle in our strategy to transform the marine industry and a chance for us to further our goal of becoming a leading global marine company by investing in the current leader in the region . . . with excellent growth potential. Having this manufacturing footprint in Australia will give BRP additional options for supporting other product lines in the future.” The marine division generated just 10 per cent of BRP’s revenue and five per cent of its gross profit in fiscal 2019.
We expect BRP to make other acquisitions within its industries. It can afford to do so. On January 31, the company held cash of $100 million. Subtract total debt of $1,215.5 million and its net debt stood at $1,115.5 million. This was only 1.7 times BRP’s cash flow of $647.7 million in fiscal 2019. This is within our usual comfort zone of two times or less.
BRP is expanding its products offering
What’s more, BRP’s cash flow exceeded net capital investment of $277.8 million, acquisitions of $193.5 million and dividend payments of $35.3 million. The excess cash flow of $141.1 million suggests that the company can finance its growth and dividend payments with internally-generated capital, as opposed to requiring lots of debt.
BRP also continues to expand its products offering. In fiscal 2019, it launched the Can-Am Ryder, a new three-wheeled vehicle. The company added two Can-Am Maverick Sport vehicles. It “introduced a direct distribution model in Russia to support its growth strategy and increase its presence.” Given that country’s cold climate and vast territory, BRP’s snowmobiles are very useful. We expect the company to continue to introduce new products as they’re developed and become available.
BRP sells luxuries. You might worry that the next recession will devastate its earnings. We don’t see it that way. The fact is, BRP’s customers are affluent. And the sizable income gains of the well off segment of the population gives them more discretionary income to spend. Especially as leisure becomes increasingly important.
BRP expects its revenue to grow from seven per cent to 11 per cent in fiscal 2020 (which began February 1). It expects its sales to climb in all divisions—though sales of seasonal products could be flat. The company expects its total earnings and earnings per share to grow again this year.
Buy new Key stock BRP Inc. for long-term share price gains as well as modest but growing dividends.
This is an edited version of an article that was originally published for subscribers in the May 24, 2019, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
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The Investment Reporter •6/23/19 •