Manufacturing stocks: this Bombardier is a buy

Headquartered in Valcourt, Que., BRP Inc. turns out recreational products such as the iconic Ski-Doo snowmobile, Sea-Doo personal watercraft, the Can-Am series of both on- and off-road vehicles and Evinrude/Johnson marine outboard engines. And, says Benoit Poirier, VP and industrial products analyst at Desjardins Capital Markets in Montreal, this manufacturing stock is a buy.

BRP Inc. (TSX─DOO) stands for Bombardier Recreational Products. And unlike those other Bombardier manufacturing companies, the ones that make jets and trains, BRP is doing well, having logged results for the second quarter of fiscal ’16 that topped Mr. Poirier’s estimates.

Mr. Poirier is reciprocating the gesture. Not only is he reaffirming his recommendation of “buy/average risk,” but he’s sticking with his price target of $33. He writes:

BRP’s net income of $0.03 a share topped our own forecast, as well as the consensus call, by $0.04. The company starred elsewhere, logging sales of $812 million — $57 million more than we’d been hoping for, as well as $26 million above the Street’s estimate.

Ski-Doos drive manufacturing stock’s revenue

BRP’s year-over-year rise in revenue mainly reflects stronger sales of seasonal products, resulting from earlier shipments of snowmobiles. The beat also reflects favourable foreign exchange transactions. All told, sales of seasonal products inched up 1.3 per cent year over year to $263 million — $99 million above our estimate.

Although the company now anticipates that its net earnings per share for fiscal ’16 will come in more strongly than before, its performance for the second half of the year is expected to be lower.

And even though revenue for the first half of fiscal ’16 rose 11 per cent year over year, BRP still expects its consolidated sales will grow just 5.9 per cent. This implies a big decline in sales growth in the second half of fiscal ’16 versus the first half.

BRP is blaming the decline on current weakness in Western Canada’s economy, as well as in emerging markets. The manufacturing company’s margins are also likely to be squeezed by higher sales, general and administrative expenses in the second half of the year, as well as by the current ramp-up of its new factory at Juarez in northern Mexico.

Still, thanks to lower depreciation expenses, BRP now sees its fully diluted EPS for fiscal ’16 ranging between $1.55 and $1.70, instead of between $1.50 and $1.65 a share. And although we expect the company to post weaker results for the second half of the year, we remain upbeat about its prospects regarding Club BRP.

Indeed, we see the company using Club BRP to introduce compelling products that should drive gains across its various segments.

In addition, we see BRP benefiting from improving conditions in the U.S. consumer market, as well as from its growing manufacturing company base in Mexico.

 

Investor’s Digest of Canada, MPL Communications Inc.
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