On page 4 of the annual report for Brunswick Corporation (BC), you will encounter the following passage: “Demand for a significant portion of Brunswick’s products is seasonal, and a number of Brunswick’s Dealers are relatively small and/or highly-leveraged. As a result, many Dealers require financial assistance to support their businesses, enabling them to provide stable channels for Brunswick’s products. In addition to the financing offered by BAC, the Company may also provide its Dealers with assistance, including incentive programs, loan guarantees and inventory repurchase commitments, under which the Company is obligated to repurchase inventory from a finance company in the event of a Dealer’s default. The Company believes that these arrangements are in its best interest; however, the financial support that the Company provides to its Dealers exposes the Company to credit and business risk.”
That is a very, very important paragraph. Brunswick Corporation is one of the most fascinating firms that I have ever studied. It has been around since 1845, when John Moses “J.M.” Brunswick abandoned the carriage business due to his growing passion for playing pool and then designing billiards tables so that he could spend his life playing pool every day as he tried to sell pool tables to middle and upper-class gentlemen in Cincinnati, Ohio (and then eventually Chicago/Lake Forest, Illinois.)
Nowadays, Brunswick shares little relationship with its illustrious past that included the creation of pinsetters for bowling alleys, ownership of the bowling alleys themselves, creations of bowling balls, bags, and other accoutrements, and the comprehensive sale of everything that someone could want in a man-cave (pool table, sticks, balls, chalk, dart tables, and so on).
The namesake and general reputation of Brunswick is now divorced from reality–it sold the bowling business in September 2014 and left bowling products entirely in May 2015. It still owns the billiards business, but now makes most of its money selling exercise equipment, boats, and financing for both of them. The specific brands owned by Brunswick are the Sea Ray, Bayliner, and Boston Whaler boats; the Mariner, MerCruiser, and Mercury engines; and the Life Fitness and Hammer Strength brands of exercise equipment.
I started my column off with a quote from the Brunswick annual report noting the highly leveraged nature of the financing side and the cyclical buying patterns for boats and exercise equipment because this is a company that gets absolutely hammered (to borrow a phrase from its fitness brand) during recessions. In 2008, Brunswick lost $113 million. The next year, it lost $475 million. And then in 2010, it lost $110 million. It returned to profitability in 2011–and has quadrupled profits in the past four years.
This cyclical nature of the business explains why Brunswick has only grown revenues from $422 million in 1961 to $4.1 billion in 2015. I opened this article with Brunswick’s statement of the risks because the bad times during recessions are so bad that it quickly wipes out years and years of gains. The investor community did not have faith in the Brunswick business model during the last recession, as the $49 per share price fell to a low of $1.80. If you bought $10,000 worth of BC stock in June 2007, you would have seen the value of the stock holding plummet to $1,200. Even the most patient, long-term, mathematically literate individuals would pause a bit in response to the following combination of facts during the financial crisis: Brunswick’s dividend was cut from $0.60 to $0.05, the reporting of significant losses that peaked at -$5.38 in 2009, and price collapse to a little over $1 per share.
This is enough evidence to suggest that Brunswick is not the kind of company that should be bought, held, and auto-reinvested as a central component of a lifetime strategy. But it is more difficult to answer the following question: Is Brunswick the type of stock worth owning under any type of circumstances?
These are the central facts in Brunswick’s favor:
- The long-term performance, which includes frequent individual business turnover that may limit its relevance, is superior to the S&P 500. Since 1981, Brunswick has compounded at 11.7% annually, almost two percentage points above what you’d get from a general index fund. Since 2000, when the fitness and boating business became central drivers of returns, Brunswick has delivered 9.11% annual returns compared to the 5.01% annual returns that you would get from the S&P 500.
- The management team did not dilute shareholders during the crisis. Brunswick had 87 million shares existing in 2007, and only had 88 million shares outstanding in 2010. When it was losing $475 million in 2009, it added debt to its balance sheet rather than promulgate a secondary offering after prices fell to $40 to $1.80. It seems self-evident that this is a wise way to manage a firm, but many MLPs are currently diluting their unitholders while the price of the business is substantially down.
- It has nearly 20% returns on equity during ordinary and good times, making this a great business to own if you anticipating days of prosperity. When the customers come, the profits are lucrative. This is why profits have grown from $0.78 in 2011 to $2.85 in 2015. When people decide they want to buy a boat, they are not usually price sensitive about 5% here or 10% there.
And plus, the returns for Brunswick coming out of a recession are absolutely mind-boggling. Since March of 2009, Brunswick has delivered 50% annual returns. A $10,000 investment in Brunswick during troubled times has grown into almost $150,000 in just six years. Timing was quite important: If you bought it in early 2007 instead, the returns would be 6% annualized (which would turn $10,000 into $17,000 today). It is never something you own indefinitely–after all, the $2.85 profits this year are only a tad bit above the $2.73 earned back in 2000. You have to have your ear tuned to the economic cycle with this one.
I think Brunswick is one of the intelligent speculations that you can make during a recession. It is best suited for someone that truly fits the profile of Benjamin Graham’s “enterprising investor.” With this type of stuff, you really have to know yourself. I know a lot of people that call themselves value investors that have no interest in BHP Billiton at $23, even though the business still makes $3.4 billion in net profits (either because they are scared off by the price decline or threat of a dividend cut). If you don’t have the constitution for BHP Billiton, what makes you think you could own Brunswick into the finality of a recession and through part of a recovery? The price declines, dividend cuts, and earnings declines at Brunswick are far more substantial than what you’re seeing at BHP Billiton, and BHP Billiton is a company that many investors reject today.
The worst way to approach this stock is by buying at the onset of a recession, watching the price decline, and then hitting a point of maximum pain during a recession that would trigger you to sell. If you start the process, and do not correctly assess your steeliness, the results with this particular investment will be disastrous.
This is only the kind of stock worth examining for someone who: (1) owns the foundational blocks of a portfolio that churn out high-quality income; (2) is immune to the effects of volatility; and (3) prepared to see the investment through substantial negative commentary and reports of bad news without flinching on the strategy. And then, you have to sell it during the good times (anything from 2013 onward would make sense). Brunswick does not have the characteristics to be a part of a core strategy for the long run, but the spring-back effects of the boating and exercise business are interesting enough to consider during a recession. The reason I call it speculative is because if the year 2009 repeats itself three times in a row, the business will go under or eventually succumb to so much dilution a la Citigroup it will be a near equivalent to a bankruptcy experience. But an ordinary recession, or a deep but short-lived recession, would likely give you the opportunity to make a lot of money quickly as part of an intelligent speculation strategy.
Originally posted 2015-12-30 13:50:42.