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Bombardier Recreational Products (BRP) Stock | NASDAQ: DOOO | TSX: DOO.TO

Covered by Stratosphere

Vehicles with Brand Power

Bombardier Recreational Products ("BRP") designs, develops, manufactures, distributes, and markets snowmobiles, all-terrain vehicles, and personal watercraft under the Ski-Doo, Sea-Doo, Can-Am, and Lynx brand names.

It also builds engines under the Rotax brand (after discontinuing the Evinrude outboard engine business in 2020) and offers parts, accessories, and clothing that cater to its core consumers.

In 2018, the company created a new marine group, acquiring boat manufacturers Alumacraft, Triton (which makes Manitou pontoon boats) and Telwater (in Australia). At the end of fiscal 2021, the company marketed its products using a network of more than 3,500 independent dealers and 190 distributors in about 130 countries.

Stratosphere Score

7

Growth

5

Valuation

10

Quality

5

Margins

4

Dividend

4

Balance Sheet

3

Investment Thesis

  1. BRP is a leader in manufacturing recreational vehicles with strong brand recognition such as Ski-Doo, Sea-Doo, Can-Am, and Lynx.

  2. Demand for recreational vehicles is hot across all segments. BRP is working on increasing capacity and resolving supply chain issues to fulfill demand.

  3. BRP has been a low-profile compounder over time posting excellent growth across its whole business. We believe its dominance across recreational vehicles is sustainable and can grow over time with BRP's leading brand names in each category.

  4. BRP can flex pricing power as it fulfills new product demand while the used market trades at above manufacturer suggested retail prices ("MSRP").

  5. The business can continue growing by tucking in acquisitions of recreational vehicle manufacturers and exploring new electric vehicle lines.

Key Company Metrics

A set of metrics we constantly keep updated to monitor the investment thesis.

Competitive Advantages

Brand Power

BRP's products have become so popular, they are now synonymous with specific outdoor activities, such as ski-doo and sea-doo. This brand power helps to attract new customers and introduces them into the world of outdoor recreational vehicles. In addition, this popularity carries on to existing customers. Users are inclined to re-purchase products in the future due to the high quality of the vehicles and reputable brand name.

BRP has grown revenues and its bottom line at rapid rates, reflecting the strong consumer demand across all product lines and gains in market share in the powersports industry.

Operating Leverage

BRP has a large fixed cost base that is spread across all units sold. Although this could be thought of as a double-edged sword in a declining sales environment, we believe it to be a major strength.

BRP's major costs relate to upholding and building products out of its manufacturing and distribution sites. However, these are capital expenditures the company makes in a short period of time from which it will reap the rewards for years to come.

Over time, the company has grown spectacularly with more of the top line flowing through the bottom line. This is operating leverage, and not many vehicle manufacturers can say they benefit from it.

As BRP continues to flex its pricing power, we would not be surprised to see margins continuing to expand beyond levels imaginable for a vehicle manufacturer. BRP is in a position to redefine how we think of the industry.

Liquidity & Buybacks

For a manufacturer of vehicles, BRP has an exceptional balance sheet with low leverage. The company has a net leverage ratio (i.e., net debt / EBITDA) consistently below 2x, a strong financial achievement for any company, particularly those in the business of manufacturing products or other capital-heavy industries.

With lots of room on the balance sheet, BRP can focus on reinvesting free cash flows at high rates of return. This is a great spot for a winning company to be in. Alternatively, BRP can grow and create value by conducting strategic acquisitions and / or continue buying back shares in large amounts.

Over the past several years, BRP has brought down its share count substantially.

Opportunities Ahead

  • It is evident how dominant BRP is when it comes to its respective markets. It provides quality and innovative products to cater to any terrain and season. To get one step further in the market, BRP plans to invest $300 million over the next 5 years to create pure electric models of its pre-existing products. BRP's main goal is to release an electric Ski-Doo and Sea-Doo, with more electric-powered products to hit the market shortly after.

  • The pandemic took a harsh toll on BRP, as its supply chain and logistics network is still facing bottlenecks. In response, BRP is expanding manufacturing capacity by building out new facilities and expanding existing ones, as well as hiring more people. The more vehicles the company can produce, the more money it will make sooner from selling its products into strong market demand.

  • BRP has astonishingly high margins for a manufacturer that also prints tons of free cash flow. As a market leader with a strong brand name, this premium company will be able to continue buying back tons of shares in an effort to return cash to shareholders. Not to mention, the performance and appeal from customers for electric versions of hit product lines may prove to be strong. As we know, BRP customers are incredibly loyal, and word will spread quickly if BRP releases another hit line of products.

Risks

Supply Chain Issues

The biggest concern with BRP right now is its ability to fulfill strong consumer demand. COVID-19 heavily disrupted its ability to fulfill production.

New production capacity needs to come online to meet the white hot demand which will be significant a capex hit, but this is a good problem overall to have as a business.

Today, customers are unable to purchase BRP products even if they are purchase-ready.

This is a short-term risk but has long-term opportunities. As many consumers have been facing lockdowns and other restrictions for the last year or two, yearning to go out, there is strong pent-up demand for BRP products. Once the pandemic is over or in a manageable state, people will be more inclined to buy outdoor activity products to make up for the time spent inside.

We are seeing the used market for BRP Ski-Doo and Sea-Doo products listed at prices higher than the new products due to the lack of supply. BRP can capitalize on this opportunity by supplying the needs of customers while also using its pricing power to make back any lost sales from the pandemic supply chain disruption.

Pent-Up Demand - For How Long?

On a similar note, we are not truly certain about the future of BRP coming out of the pandemic. While the company is working to meet pent-up demand, will growth continue at these rates?

BRP's products are of high quality and built to last. The company's revenue profile is also such that it makes most of its sales from wholesaling its products to dealers and distributors.

With this information, BRP is mainly a volume business. Once again, we cannot be certain about the future of BRP, nor how it will behave in light of economic weakness. COVID-19 was a time of reprioritization for many, and an event like this may not happen again. Therefore, we would be cautious to watch how sales volumes look a year or more after the pandemic is fully over.

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