Brunswick has one of the greatest legacies in the history of American business. How many companies out there have track records dating back to before the Civil War, as Brunswick does with its inception back in 1845?
The obvious downside with a business like Brunswick is that a majority of its product sales are cyclical. Manufacturing and boats are great, except during a recession. That can be tolerable, as the average years and good years can provide high enough profits to roll the muck that is encountered during the down years.
My fear is that, upon seeing the announcement that Brunswick is spinning off its fitness business, which includes the brands Life Fitness, Hammer Strength, and Cybex, Brunswick is forgetting about the importance of diversification that is necessary to weather the inevitable recessions.
Most analysts seem to approve of the 2019 scheduled spinoff of the fitness business, saying things like: “Management will be able to more fully dedicate resources to Boston Whaler, Baylinder, and Lund.” The premise of this comment reflects that, in 2018, the sale of a boat earns twice the returns on Brunswick’s capital that it earns on exercise equipment.
But I don’t agree with the analyst consensus. During the last recession, Brunswick lost a little over $100 million in 2008 and 2010, and lost a whopping $500 million in 2009. If there were no life fitness division during this time, the losses would have been $212 million in 2008, $718 million in 2009, and $234 million in 2010.
That means that, if the past recession were to repeat itself, Brunswick would need to borrow an additional $500 million. I’m not sure the balance sheet is that strong to support the additional borrowing.
Right now, Brunswick earns annual profits of around $375 million. That figure will dip into the $270 million to $290 million range once this spinoff is complete. The current debt load of $433 million is mostly tied to the boating operations, and though Brunswick has not yet provided the debt and capitalization information for the fitness division, I would expect that Brunswick will continue to carry around $400 million in debt. Combined with a pension that is underfunded by $200 million, the prospective deficiencies begin to add up.
During the last recession, the share price of Brunswick fell from $35 to under $2 per share. Its solvency was in question. If I were managing any company, but especially one that has survived Civil Wars and World Wars, I would put it in position to last until your great-grandchildren’s generation because that is how you should act as a steward for a timeless jewel. You buy non-cyclical assets and bolster the balance sheet. If that means lower growth, so be it. I’ll take 6% compounding while everyone else is getting rich over prospective bankruptcy, every time.
But instead, it is selling off some of the assets that off-set the deep boating losses during the last recession. Who cares if you can eke out 20% compounding from the marine division if the very solvency of the business can’t survive the next downturn in the economy that will inevitably occur?
I think it’s crazy to purchase Brunswick stock during prosperous economic conditions. If you ever think about owning it, it should only be during highly destabilized economic circumstances. At this point, I cannot even guarantee that will work out, as management is removing one of its recessionary safeguards in the pursuit of higher, more focused boat profits now. I do not endorse this spinoff, and I would not sleep well at night with a sizable chunk of personal wealth in Brunswick, even if it performs well in the coming years.
Originally posted 2018-10-28 14:24:53.