BRP Beats on Q2 2024 Sales and Earnings, but Is It Enough?

Investing

Published: September 13, 2023 6:55 am

Last Updated: September 13, 2023 11:25 am

BRP (US:DOOO) reported record second-quarter 2024 results last week, delivering revenue and normalized earnings that were better than analyst expectations.

On the top line, sales were $2.78 billion (All figures in Canadian dollars, unless otherwise specified.), 14% higher than a year ago, and $110 million above the consensus estimate. On the bottom line, its adjusted earnings were $3.21 a share, 27 cents higher than Q2 2023 and 24 cents better than analyst estimates.

The company said strong volume and pricing were responsible for the best second quarter in its history. Based on these results and BRP’s optimism for the second half of the fiscal year, one would think the share price would move higher over the next few weeks.

Unfortunately, BRP’s stock has struggled so far in 2023 despite its strong financial performance. Eking out less than 1% improvement, it pales in comparison to peers’ performance. Brunswick (US:BC) is up more than 6% since the start of the year.

So, despite the Q2 beat, the latest results might not be enough.

What’s Holding DOOO Stock Back?

For all of 2024, the Canadian maker of snowmobiles, ATVs and personal watercraft, expects revenue growth of 8.5% at the midpoint of its guidance, down 200 basis points from its previous estimate of 10.5%.

However, from its previous outlook, it did raise the midpoint of its guidance for normalized earnings per share to $12.60, up 10 cents.

“With our solid momentum, we expect fiscal 2024 to deliver record revenues and profitability. Reflecting our positive outlook, we are increasing the range of our financial guidance to Normalized EPS – diluted [1] between $12.35 and $12.85,” BRP CEO José Boisjoli stated in its Q2 2024 press release.

Given the strong first half, BRP stock should be up significantly in 2023. That’s not the case. That flat year-to-date performance is down more than 3% relative to the S&P/TSX 60 Index.

There is no question higher interest rates have BRP management going very conservative with their guidance for the second half of fiscal 2024.

While it expects its side-by-side (SSVs) and all-terrain (ATV) vehicles, along with its Can-Am three-wheel vehicles — they are part of its Year-Round Products segment — to grow revenues by 16% to 19% over last year, the Seasonal Products and Powersports Parts, Apparel & Accessories (PA&A) segments are expected to see sales declines in 2023.

With Year-Round Products accounting for nearly 54% of its overall revenue in the first six months, any slowdown in this area will affect revenues and earnings for the remainder of the year.

As more economists point to some recession in 2024, investors have become hesitant to overpay for growth that might not come. That’s holding back its stock.

Why Should Investors Be Optimistic?

Fintel recently covered BRP’s new products for 2024. Among the nice toys was the launch of the all-new 2024 Can-Am Maverick R SSV off-roading vehicle. The $44,000 SSV is the most powerful in the industry. The company is excited about the dent in market share the Maverick R should make in the SSV marketplace.

The company had a strong showing in the second quarter at the retail level. Its North American retail sales were up 41% from Q2 2023, with a 23% increase over the first six months of the fiscal year. As a result, it is taking market share in the personal watercraft (PWC), ATV, and SSV markets.

For 2024, it expects net income of at least $1.025 billion, 18% higher than in 2023.

“The Company continues to expect another solid year, reaffirming its Normalized EBITDA increase ranging from 9% to 13% compared to the previous year and anticipates that about 45% of the implied Normalized EBITDA for the rest of the year will be generated in the third quarter,” BRP’s press release stated.

Its free cash flow generation in the first half was nearly $750 million higher than a year ago, when it used $222 million in free cash flow, compared to positive free cash flow of $528 million in 2024. For the trailing 12 months, its free cash flow is $740 million.

Based on an enterprise value (EV) of $10.7 billion, BRP’s free cash flow yield [free cash flow divided by EV] is 6.9%. Anything around 7% or higher is considered a quality investment.

Given BRP’s leadership position in powersports, patient investors buying around $100 should be rewarded over the next 24 to 36 months.

This article originally appeared on Fintel