BRP Inc. was founded in 1942 as L’Auto-Neige Bombardier Limitée (Bombardier Snow Car Limited) by Joseph-Armand Bombardier. It was spun off by Bombardier in 2003. Canada has fairly few large and successful manufacturers. But you can add to your holdings of Canadian manufacturing stocks by buying Greater Montreal Area-based BRP Inc.
BRP Inc. (Bombardier Recreational Products) (TSX—DOO) is expected to earn record profits this year and next and has begun paying dividends. While the Beaudoin-Bombardier families control the company, it’s managed by non-family members. It’s a buy for share price gains and, now, small dividends that should rise in the years ahead.
BRP is “a global leader in the design, development, manufacturing, distribution and marketing of power sports vehicles and propulsion systems. Its portfolio includes Ski-Doo and Lynx snowmobiles, Sea-Doo watercraft, Can-Am off-road and Spyder vehicles, Evinrude and Rotax marine propulsion systems as well as Rotax engines for karts, motorcycles and recreational aircraft. BRP supports its line of products with a . . . parts, accessories and clothing business.”
The word ‘global’ is apt. Indeed, BRP generated fiscal 2016 revenue of C$4.2 billion from more than 100 countries. This geographical diversification reduces its exposure to economic conditions in any one country.
A product for all seasons
Its line of products also reduces BRP’s exposure to seasonality. Snowmobiles do well in the winter. When these sales fall off in the spring and summer, sales of watercraft and recreational vehicles pick up.
In the six months to July 31, BRP earned ‘normalized’ net income of $48.9 million, or 44 cents a share. This was up sharply from normalized net income of $5.8 million, or five cents a share, a year earlier.
In the first half of fiscal 2018, BRP’s revenue advanced by 11 per cent, to $1.983 billion. This exceeded the 10 per cent rise in the cost of sales. What’s more, its operating expenses fell by 14 per cent. Even better, the company’s net financing costs fell by 13.3 per cent. It earned lower foreign exchange gains and paid income taxes. But BRP doesn’t control foreign exchange and tax rates.
Positive equity, growing earnings and a dividend
BRP has other things going for it now. It finally has positive shareholders’ equity. Since the equity is low, the stock’s return on equity is a high 93.8 per cent.
BRP now pays dividends of 32 cents a share. This yields less than 0.8 per cent. While that’s small, paying even just a token dividend is a positive indicator.
We expect this dividend to grow. That’s because BRP earns well above 32 cents a share. In the year to January 31, 2018, BRP is expected to earn a record $2.33 a share. Based on this estimate, the shares trade at a reasonable price-to-earnings, or P/E, ratio of 17.6 times.
Next year, BRP’s earnings are expected to climb further, to a new record of $2.66 a share. Based on this estimate the shares trade at a better P/E ratio of 15.3 times.
BRP also has a safe net-debt-to-cash flow ratio of 1.9 times. This is within our standard comfort zone of two times or less. It also gives the company financial flexibility. This, too, can assist it in maintaining and increasing the dividend.
The consensus recommendation of six analysts is ‘buy’. We agree. Buy manufacturing stock BRP for long-term share price gains and dividends.
This is an edited version of an article that was originally published for subscribers in the September 29, 2017, 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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