Bombardier Recreational Products: The market was right

The world leader in recreational vehicles - specializing in snowmobiles, quads, leisure boats and jetskis, among others, and owner of the BRP, Can-Am, Ski-Doo and Manitou brands - had long been saddled with a modest single-digit valuation multiple.

This may come as a surprise for a well-managed group, solidly positioned in Canada and North America, which succeeded in tripling its sales over the previous ten-year cycle, and which despite this expansion remained able to distribute all its profits to its shareholders.

BRP - short for Bombardier Recreational Products - is no stranger to MarketScreener readers. See BRP Inc. First signs of recession and BRP Inc. Spectacular growth, very low valuation published in these same columns over the past two years.

In reality, the market was right, as it often is when it values cyclical companies at very low multiples. This is an almost certain sign that profits have reached a peak in the cycle and are about to suffer a severe contraction; just as, conversely, a stratospheric multiple often indicates an imminent recovery.

Like so many other businesses, BRP's was profoundly affected by the pandemic and its aftermath. Rather than a decline, the results for the fiscal year just ended indicate a normalization after two crazy years during which the manufacturer responded to an influx of orders without shying away from raising its prices.

The party's over in 2024, with gross margin at its fifteen-year low and operating margin at its ten-year low. If net income is negative, it is mainly because it is impacted by an asset write-down linked to the sale of the Marine division, which we learned ten days ago would be acquired by Bryton Marine Group.

Inventory liquidations continue, providing free cash flow of $313m, which as usual is returned in full to shareholders via $201m in share buybacks and $62m in dividends, in addition to $108m in repaid debt.

BRP has invested over $1.6bn in share buybacks over the last four years, at valuations between 6x and 8x EBITDA. Here, the group remains true to its cannibalization strategy, reducing the number of shares in circulation by a third in ten years.

If it maintains its pace and returns to growth, the new cycle that is beginning will undoubtedly be very lucrative for its shareholders. If, on the other hand, the company's market continues to contract, the priority will be to deal with the most pressing problems and reduce debt, leaving shareholders with no choice but to be patient.