Bombardier Recreational Products (BRP)

Bombardier Recreational Products (BRP)

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Overview

Bombardier Recreational Products (BRP) is a developer, manufacturer and marketer of powersport vehicles based out of Valcourt, Quebec and was spun off from Bombardier in 2003. BRP was privately owned until May 2013 when it went public and sells primarily to North American and European markets.

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I will highlight a few major growth themes for BRP in the next paragraphs.

Growth in Year-Round Products

The company derives revenue from 4 major product segments: year-round, seasonal, propulsion systems and parts & accessories. Year-round products (ATV’s, SSV’s, Roadsters) account for 36% of revenue and enjoyed a 24% increase from last year. The Side-by-Side vehicle market has seen a lot of growth in recent years and has constituted BRP’s fastest growing segment (4% of revenue). This momentum is expected to continue as BRP has a strong product lineup able to withstand competition. In spite of the industry wide decline in ATV sales, BRP increased its market share in the ATV segment to about 9% as it repositioned its products away from utility and more towards the recreational space.

The Spyder Roadster is a three-wheeled motorcycle unique on the market (for now at least, since Polaris announced they will be introducing their own version in 2014) that has been capturing an older, female focused demographic. Revenue from this product has been growing at a compounded annual growth rate of 20% since 2008 and even through sales have been flat in the last 2 quarters, the aging population in North America should provide for significant growth potential for the Spyder in future years.

Growth in the Spark

BRP introduced the Spark last year, a sea-doo starting at $4,999USD which is the lowest cost sea-doo on the market at the moment. It comes in a variety of colors, it is lighter and almost 35% more fuel efficient than the closest competitor. It has been attracting a lot of first time buyers, younger demographics and emerging market consumers and has reportedly recently sold out in Brazil, New Zealand and Australia. Given the low price point it is also highly likely that the Spark will attract new, more price sensitive enthusiasts to the sport that have not been able to afford a sea-doo before. BRP is currently the leader in the Personal Watercraft (PWC) market with a 45% share and was able to seize a great opportunity in 2010 when Honda decided to exit this market, prompting BRP to increase its share by 5%. With a total of 16 Sea-doo models produced, management expects the Spark to lead to cannibalization of up to 10% of total sales in this segment.

Improving Operational Efficiency

BRP has a total of 8 production facilities located in Canada, the US, Finland, Austria and Mexico. A second Mexico production facility was opened last year in Queretaro where BRP plans to gradually transfer all of its PWC production by 2017. This is estimated to eventually lead to $20-25 million in annual cost savings. The US Bureau of Labour Statistics estimates that the average labour costs in Mexico are about 35% of those in the US and Canada while Mexico’s proximity to Latin America and Southern US provides for lower transportation costs (BRP derives 43% of its revenue in the US and 6% in Latin America). This is the company’s second facility in Mexico and adds a significant cost advantage in comparison to its peers, as Polaris is the only competitor that outsources production to a lower wage region.

Valuation

Based on a comparable company analysis, BRP has an intrinsic value of $33 which is an implied upside of about 12% from the current stock price. This was obtained using a blended EV/EBITDA multiple of 9.5x and P/E of 15x on 2016 consensus estimates. The multiples are in line with the industry peers and slightly below the industry leader, Polaris who has superior margins, better market positioning being such a well known brand and a well developed dealer network. Although BRP has faster growing margins compared to Polaris, an expanding dealer network and is increasing marketing efforts to get its products recognized, Polaris’ influence needs to be acknowledged.

Risks

Polaris is the leader in the SSV market with a 42% share and is introducing a new SSV model which could be a potential threat for BRP’s Commander, but with a price tag about $4500 above the comparable BRP model, the risk becomes minimized. Yamaha, a smaller player in the powersport vehicle market, is revamping its growth strategy and introducing 250 new products over the next 2 years which also incorporate off-road vehicles. The lineup will include a new SSV model that will, fortunately for BRP, have a smaller engine than the comparably priced BRP model. Wildcat, Artic Cat’s newest SSV could prove to be a potential competitor for BRP’s Commander however, it does target a different consumer as it is more of a sport vehicle compared to the utility oriented Commander.

On the Roadster front, Yamaha is set to launch a three-wheeled scooter similar to BRP’s Spyder but with an engine less than half the power of the Spyder it would definitely be targeting different riders and is, in my opinion, a lot less appealing (imagine a scooter with 2 front wheels). Polaris is set to launch the Slingshot in 2014, a three-wheeled vehicle resembling a convertible sports car.  Although it is worth monitoring to see its impact on the market, the Slingshot caters to a different set of consumer needs compared to the Spyder which is targeted mostly at the motorcycle market.

Lastly, a slow down in the global economy can pose a risk to BRP given the discretionary nature of its products. The company managed to grow its share in the powersport vehicle market from 8% in 2008 to 13% in 2013 partly due to the economic recovery and partly because of its reputation as a high quality, innovative and superior execution producer. With an increasing dealer network, continued introduction and positioning of superior products and increasing margins, BRP is set for strong growth ahead.

Tina Bazarca is a Research Associate for the Rotman Asset Management Association. She will be graduating from the MBA program at the Rotman School of Management in 2015. Tina can be reached at tina.bazarca15@rotman.utoronto.ca

 

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