BRP Inc.: Market Is Hot, Shipping Products For Retrofit Not Included In Revenue Yet – Seeking Alpha

IgorTsarev/iStock via Getty Images

IgorTsarev/iStock via Getty Images
BRP Inc. (NASDAQ:DOOO) is a company that we discovered in the mid-year. What struck us is the movement towards outdoor activities, and powersports as one of the several beneficiaries of this trend. The revenue growth and EBITDA growth YTD have been phenomenal, and the company is growing its facility capacity in order to capitalise on the market trends. These facility expansions will increase market share substantially, but first the company has to get through the current environment of shortages. Indeed, the current quarter wasn’t great as a result of them. However, we see several distinct reasons for that which ultimately point to a likely strong Q4, and perhaps an even stronger Q1 in the 2023 FY. Overall, BRP remains attractive even though timing the investment is tough.
Q3 has been a complicated moment for the company, but without surprise. Last quarter, the inventories were already collapsing, and it was becoming obvious that the superb retail growth that they were seeing was unsustainable. Not because the demand wouldn’t support it, but only because of supply. Indeed, pre-sales are up phenomenally, and the launch of the Sea-Doo Switch pontoon has generated remarkable interest. New entrants continue to be an elevated part of the sales mix, 36% over the usual 20% to be exact, and the trends remain extremely attractive.

(Source: Q3 2022 DOOO Pres)
However, things remain pretty tough. While Snowmobile production has been harangued by the fact that the company has focused resources, due to seasonality and with the option of flexibility, elsewhere in the business, where margins are higher, other segments have seen declines for similarly peculiar reasons. Fires at the Juarez facilities have been a major issue for the North American retail segment. While BRP already outpaced the industry, they would have actually grown in the mid-teens were it not for the fires that destroyed quite a few, very scarce units. YTD, revenue is up over 25% and EBITDA over 50%, but in the Q3, the YoY changes were a decline of 5% and 25% respectively. Overall, these one-off industrial issues as well as the supply shortages have been the reason for the declines.
Another peculiarity that came up in the call was to do with retrofit sales. BRP is delivering incomplete products to dealers to get them closer to the customers where the possibility of retrofitting them at location with the remaining components is possible. Getting the products under the noses of customers is very important, but these deliveries are not being counted in revenue and detracted from the company’s inventory. Apparently, these sorts of deliveries are up 2.5x from previous quarters, and are going to be a nice impulse on sales when retrofits come through, and the sales are realised in Q4.
In the coming Q4, we expect those retrofit sales to start materialising, although further realising of those sales should also continue into Q1 of the 2023 fiscal year. Furthermore, while the commodity environment is likely to still pressure margins going forward mitigated by very constructive pricing, the availability of inventory should start to see modest improvement going forward as well, allowing BRP to capitalise on the market and its eventual capacity additions when they come into play.
With regards to snowmobiles, BRP’s most intensely seasonal product, in the Q3 all of the priority went to other products that had more pertinent markets outside of the winter season. Snowmobile revenues lagged the industry slightly down in the high 40s versus mid 40% for the rest of the industry. Much of the priority has already reverted to snowmobiles, where a lot of the deliveries are scheduled for Q4. We should see some catch up in the snowmobile category for industry leading results, where BRP is indeed the snowmobile market leader, in the Q4.
There is another factor worth mentioning on a forward going basis which is the receivables bulge experienced this quarter. Cash flows were actually negative this quarter due to a bulge in receivables at around $800 million. Management expects a substantial net decline of these receivables by about 25% in the Q4. Their existence is primarily attributed to the timing of deliveries in Q3, which were mostly towards the end of the quarter. BRP is likely realising a good deal of these receivables already.
All of BRP’s product categories were down, and several products, like pontoons, remain exposed to tight markets, both in terms of margin compression but also in terms of availability bottlenecks. However, the situation is about as bad as it can be in this quarter. Inventories were already massively depleted last quarter, so this quarter is a good barometer for how the company performs when they’re playing catch-up with the inventory. With a strong recovery expected for Q4, albeit with availability, especially at high Christmas season, likely to still be a limiting factor especially with logistics, we still believe BRP represents a rather attractive investment with a strong compounding engine. Powersports as a sector is apparently just 15% off its 2006 peaks, but this time around there is a clear impulse of the pandemic to support outdoorsmanship, and we believe that the market is prepped for enduring growth, with BRP at attractive value within the sector.
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This article was written by
Valkyrie Trading Society is a group of Bocconi Alumni who have graduated into successful financial services careers. We seek to provide honest and global dividend-value insight leveraging our group’s broad and deep experience in finance to contribute to Seeking Alpha. We provide more obscure research on our marketplace service, The Value Lab, covering value stocks in global developed markets.

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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