Citi Initiate Coverage BRP Inc. (DOO-T) has “undeniable share momentum” even as the powersport industry “falters,” said Citi analyst James Hardiman.
“BRP is the dominant player in a number of mature and fairly static powersports segments (snowmobiles & personal watercraft) and the up-and-coming player in more dynamic segments (ORV, motorcycles, and marine),” he said. “Additionally, the company’s MY23 crop of new products (namely the new SeaDoo Switch, Manitou pontoon, and Rotax outboard engine) all have the makings of share gainers in their respective segments, in our view.”
In a research report released Monday, Mr. Hardiman said there’s “great deal to like about the BRP story,” emphasizing the Valcourt, Que.-based company’s portfolio “features both defensible leadership positions and substantial market share opportunities.”
“In both cases, BRP’s long track record of high-quality products and consistent innovation should (in our view) allow it to gain share for the foreseeable future, even if the market itself is difficult to handicap,” he added
While he pointed out leisure stocks have seen a “substantial” rebound lately with BRP up almost 45 per cent from 2022 lows, Mr. Hardiman thinls the powersports industry is showing “signs of slowing.”
“Our most recent dealer checks and industry data show an ORV [off-road vehicle] industry down mid- to high single digits year-over-year to finish the year (down mid-teens year-to-date), a powerboat industry down low-30s (down mid-teens YTD) and other powersports segments (motorcycles, RVs, snowmobiles, etc.) similarly struggling to get footing,” he said. “More broadly, a combination of inflation and higher financing rates puts pressure on big ticket items. While BRP’s market share gains have more than offset industry weakness so far, we fear that the industry backdrop will get worse before it gets better, limiting the stock’s upside potential near term.”
Accordingly, while seeing it “positioned to be a long-term winner,” he thinks tactical investors are likely to seek out better entry points, leading him to initiate coverage with a “neutral” recommendation and $123 target. The average on the Street is $132.50.
“Our estimates are slightly ahead of the Street for 4Q23 (the current quarter) and more meaningfully ahead for 1Q24 — Subsequently, a combination of a slowing industry, decelerating share gains, difficult replenishment comps, and an increasingly promotional environment puts us short of the Street in 2Q-3Q, with our FY24 estimate falling $0.26 short of the Street before coming back in line ($14.01 vs. $13.95) in FY25. Our price target of $123 (13% upside) equates to 10 times our FY24 EPS estimate,” he concluded.