BRP (TSX:DOO)(NASDAQ:DOOO) is in the business of designing, developing, manufacturing, and selling power sports vehicles and marine products. The company has worldwide distribution and manufactures the products in Canada, Mexico, Austria, the U.S., Finland, and Australia.
The company reports a market capitalization of $5.75 billion with a 52-week high of $67 and a 52-week low of $32.36.
An interpretation of the numbers
For the nine months ended October 31, 2019, the company reports a mediocre balance sheet with $558 million in negative retained earnings (explained below). With a company as old as BRP, I would expect to see positive retained earnings as it would indicate the company had more years of cumulative net income than net loss.
Aside from the retained earnings, the company reports strong cash balance of $124 million coupled with an increase in PP&E from $905 million to $960 million. Inventories are up $306 million which could suggest a slowdown in sales, increased inventory in anticipation of winter, or a combination of both.
Overall revenues are up from $3.7 billion in 2018 to $4.4 billion in 2019. Operating income for the period is $407 million which resulted in after-tax income of $252 million. Undoubtedly, a contraction in the economy will have a material impact on the company’s revenues and net income, which is why I am hesitant about investing in BRP now.
Cash flows continue to be strong with steady capital expenditure spending and increasing cash inflow from operations. The only thing I am concerned about is the $457 million draw on the company’s long-term debt. There is no specific project mentioned on the statements, which suggests the draw is for the day-to-day operations of the company.
But wait, there’s more
Looking at the company’s notes to its financials uncovers a couple of important items.
Firstly, the company increased the limit on its revolving credit facility to $700 million from $575 million. I don’t consider this news good or bad as more information will be needed on how the company intends to use the additional $125 million. Further to this, the company increased its term facility to increase its total facility to US$1.235 billion. Similar to the revolver, it cannot be determined how the company intends to use the increase.
Secondly, the company renewed its normal course issuer bid (NCIB) in March, 2019. To date, it has purchased and cancelled 2,457,255 shares for $120.1 million. It also issued a substantial issuer bid offer (SIB) whereby it purchased and canceled 6,342,494 shares which resulted in a $270.6 million charge to negative retained earnings. This resulted in a larger negative retained earnings than usual.
As the market corrects itself in 2020, I believe investors will see shares of BRP drop significantly. I don’t think the current share price presents a good opportunity to buy because of the correlation between BRP’s stock price and the economy. As a recession takes full effect you should be able to buy BRP at a discount.
Investors looking to diversify their portfolio and purchase shares of a recreational products stock should add BRP to their watchlist. Despite the negative retained earnings, the company’s revenues continue to increase and it has no problem accessing additional capital to grow the business as indicated by the increase in its revolving facility and term facility.