After a year that left
in the gutter, analysts and investors are starting to think the bowling and boating conglomerate may offer investors a chance to pick up an easy spare.
Lake Forest, Ill.-based Brunswick specializes in equipment for sports that are participatory -- but usually not sweaty. The company operates more than 125 bowling alleys worldwide, and its marine division is the world's largest seller of boats and boat engines.
That product mix has left the company well positioned to capitalize on the aging of the baby boomers. With demographics on its side and a couple of timely acquisitions, Brunswick's sales have grown from $2.2 billion in 1993 to almost $4 billion this year. Given Brunswick's market capitalization of about $2 billion, that gives the company a price-to-sales ratio of 0.5, well below the ratio of one that value investors like.
But by other measures, Brunswick's ride hasn't been so smooth. After more than doubling between the beginning of 1995 and early this year, the company's stock plunged, falling from a high of 35 11/16 to a low of 12 in September. Since then, it has rebounded a bit. In late Friday trading, the stock was off 3/16 to 21 1/16.
The drop, which reduced Brunswick's market capitalization by more than $2 billion, came after investors grew worried about the effect of the Asian crisis on its bowling business. No, that's not a misprint. Bowling turns out to be big business in Asia. Korea has one bowling lane per 2,700 people, almost as high a ratio as the U.S., which has one per 1,800, according to Hayley Kissel, an analyst with
, which has underwritten several Brunswick debt offerings. Kissel rates Brunswick accumulate.
Brunswick expected China, which has just one lane per 255,000 people, to represent a huge market for years to come. But stricter Chinese credit controls caused the company's annual sales of bowling equipment in Asia to fall from $140 million last year to less than half that in 1998, Kissel says.
Investors punished Brunswick further after the U.S. stock market began to fall over the summer amid fears that the U.S. economy was slowing. Boats are big-ticket purchases, and the company's marine division is viewed as economically sensitive -- and especially vulnerable to a slide in equities, which represent about half of U.S. personal wealth.
Finally, an Arkansas jury awarded a group of boat builders $44 million inJune after deciding that Brunswick had unlawfully monopolized the boat-engine market. Under antitrust laws, the award was automatically tripled, leaving Brunswick on the hook for a $133 million judgment. The company now faces a similar suit in Minnesota.
Merrill analyst Kissel says the company's maximum exposure on the antitrust suits is roughly $300 million, or about $3 per share. While that would cost Brunswick more than a year of profits, "it's not going to put them out of business," she says. Brunswick declined to comment on its potential liability.
But despite all the bad news, Brunswick's fans find plenty to like about the company. For starters, the company's core businesses remain strong. Despite worry about a slowing economy's effects on boat sales,Brunswick's marine division recorded sales of $640 million during the third quarter, up about 10% from the same period a year earlier. The division's operating income also showed a dramatic turnaround in the quarter, with a $5 million loss in 1997 becoming an $84 million profit this year.
In its sports division, Brunswick is attempting to shrink costs. In the third quarter, it took a one-time $60 million charge to cover its sale of 15 underperforming bowling alleys worldwide, to shut a plant in China and to close several warehouses. The company says the charge will pay for itself in three years. (The charge comes on the heels of a $98 million charge taken in 1997, mainly to cut costs in the company's boat division.)
Even after the charges, Brunswick is solidly profitable. Including both one-time charges, earnings rose to $146 million, or $1.46 per share, in the year's first nine months, from $119 million, or $1.18 per share, in the year-ago period. According to
, Brunswick is expected to earn $2.17 per share for 1998, excluding the charge, and about $2.35 per share for next year. At its current price,Brunswick has a price-to-earnings ratio of less than 9 based on 1999 earnings.
That's barely one-third of the P/E of the average
stock, a gap that gives investors a lot of cushion should Brunswick's business turn south.
"We think that the drop of the stock from its highs was an overreaction," says David Boczar, an analyst at Connecticut's
Value Investing Partners
. "When the stock moved lower, we upgraded it from buy to strong buy to take advantage of the weakness." Value Investing Partners has no underwriting relationship with Brunswick.
Brunswick's largest institutional investor is equally bullish, despite the company's troubled stock.
, which runs the $7 billion
Oakmark fund, took advantage of the summer's collapse inBrunswick to buy another 950,000 shares of the stock, according to filings with the
Securities and Exchange Commission
. Harris now owns more than 7.5 million Brunswick shares.
Harris analyst Kevin Grant says Brunswick has historically traded at a P/E of 15. The $133 million judgment against the company has depressed its stock, but "as visibility gets better on this lawsuit, as the appeal gets started, this thing could trade at a more normal P/E level," he says. If Brunswick earns $2.35 per share next year, a P/E ratio of 15 would put its stock at 35.