Another Raised Target Following off-road vehicle channel checks, second-quarter earning season and an examination of powersports inventories, Citi analyst James Hardiman upgraded BRP Inc. (DOO-T) to “buy” from “neutral” previously, seeing it continue to secure market share gains from rival Polaris Inc.
“Based on our conversations with ORV [off-road vehicle] dealers, we estimate that PII North American ORV retail sales in 3Q to date have slowed meaningfully from the 14 per cent reported by the company, with strong 3Q growth no longer a certainty,” he said. “Conversely, despite the ups and downs of the ORV industry, BRP appears to have absorbed PII’s best shot earlier in the year and continues to see consistent share gains throughout. Additionally, BRP appears to be seeing better pricing and is less promotional than PII with our initial look at MY24′s.
“We are significantly more comfortable with DOO’s inventory strategy, as the company continues to chase demand, as opposed to a much more aggressive stance taken by PII, who appears to be punting the $750-million replenishment headwind into 2024 — Separately, we conducted a deep dive on powersports inventories, and after taking their medicine in the second half of this year, BRP is well positioned to go after its FY25 targets, despite broad investor skepticism/disbelief.”
While Mr. Hardiman expects both stocks to “trade on near-term retail trends,” he opened a pair trade between the two, going “overweight” on BRP and “underweight” on Polaris.
“The sizable valuation premium accorded to Polaris does not mirror the performance of these two companies, and we would not only expect BRP to outgrow Polaris going forward, but we would also expect this valuation delta to close over time,” he said.
The analyst pointed to three factors in justifying his trade: “1. Despite taking PII’s best shot during the first half of the year, we believe that BRP is continuing to take share in the ORV space, and is the best bet to take share going forward; 2.We are significantly more comfortable with DOO’s inventory strategy, as the company continues to chase demand, as opposed to a much more aggressive stance taken by PII, who appears to be kicking the $750-million replenishment headwind into 2024; 3. DOO trades at a significant (2-plus) P/E discount to PII, which is down from the early-summer peak but nonetheless towards the high-end of the trading range over the past three years. We would also note that DOO benefits from arguably the best share and growth dynamics in our coverage, and should arguably trade at a premium to PII in our estimation.”
In response to last week’s second-quarter earnings release, Mr. Hardiman raised his target for BRP shares to $128 from $111. The average target on the Street is $135.11.
“We rate BRP, Inc. shares a Buy,” he said. “There is a great deal to like about the BRP story, as the company’s powersports 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.”
His target for Polaris fell to US$110 from US$138 with a “neutral” rating (unchanged). The average is US$128.17.