Queens Capital

December 9th, 2014

Brunswick Corporation Pitch (NYSE: BC)

Jehan Ghandhy Analyst

Hans Shen Analyst
Kelvin Li Analyst
Jung-Yung Chang Publications
Made by Jung-Yung J. Chang

Disclaimer
The analyses and conclusions of Queens Capital contained herein are based on publicly
available information.The analyses provided may include certain statements, estimates and
projections prepared with respect to, among other things, the historical and anticipated
operating performance of the companies, access to capital markets and the values of assets
and liabilities. Such statements, estimates, and projections reflect various assumptions by
Queens Capital concerning anticipated results that are inherently subject to significant
economic, competitive, and other uncertainties and contingencies and have been included
solely for illustrative purposes. Actual results may vary materially from the estimates and
projected results contained herein.
Queens Capital assumes no responsibility or liability for any error, inaccuracy, or omission
contained that may be made of such information by the viewer.No information herein may
be replicated without prior consent by the Executive Board of Queens Capital.

Made by Jung-Yung J. Chang

EXECUTIVE SUMMARY

Company
Overview

Macro/Micro
Factors

SUMMARY

Investmen
t
Thesis

Company Overview

Macro/Micro
Analysis

Valuation

Catalysts/
Risks

Investment Thesis

Catalysts/Risks

Valuation

APPENDIX

Made by Jung-Yung J. Chang

COMPANY OVERVIEW
Business Overview

Operation Segmentation
Worldwide
designer,
manufacturer
and marketer of
recreation
products,
including
marine engines,
boats, fitness
equipment and
bowling and
billiards
equipment.

Engine products: outboard, sterndrive and inboard engines; trolling

motors; propellers; engine control systems, and marine parts and
accessories.
Boat products: fiberglass boats; sportfishing convertibles and
motoryachts; offshore fishing boats; aluminum fishing boats, and
pontoon and deck boats.
Fitness products: include both cardiovascular and strength training
equipment for the commercial and consumer markets.
Bowling & Billiards: bowling equipment, billiard tables, gaming tables,
and gaming accessories.

DUSTAN E. MCROY

MARK D. SCHWABERO

WILLIAM L. METZGER

Board Chairman, CEO

President, COO

Senior VP, CFO

SUMMARY

Past Experiences
Mercury Mine President
President of Bosch
Braking Systes
VP at Medium Duty
Products

Company Overview

Past Experiences
VP and Treasurer of
Brunswick since start in
1987

Macro/Micro
Analysis

Source: Company Website, Thomson One, Google Images (Pictures)

17%
50%
25%

Boat
Fitness
Bowling and
Billiard

Absolute Relative Performance to SPX

Management
Team
Sept 2014: the Company
sold its Retail Bowling
business to Bowlmor
AMF

Past Experiences
Witco Corporation VP
Director at FreeportMcMoRan Copper & Gold
Inc. and LouisianaPacific Corporation

Marine
Engine

8%

Investment Thesis

PX_LAST2

Catalysts/Risks

Valuation

SPX

APPENDIX

Made by Jung-Yung J. Chang

MACROECONOMIC ANALYSIS
Income and Participation Increase

Online Movement

2014 Per capita disposable income: expected to increase

Will drive consumers to invest/upgrade their sporting goods

particularly important for higher-priced sports, such as

skiing, scuba diving and golf, which require higher initial
investment compared with other sports

Over the past five years, growth in the sports participation rate
has increased by 1% and continues to grow steadily.

Increase in demand translates into higher demand for

sporting equipment

Projected Trends in Sports/Disposable Income

Participation in Sports

SUMMARY
Source: IBIS World,

Many industry retailers have moved operations online

Able to reduce administrative costs and better positioned
to reach a wider range of consumers

Has allowed wholesaler bypass, in which retailers purchase

merchandise directly from manufactures -> bolstered
industry revenue.

Diversified line of sales will translate into higher sales

quantity and higher profit.

Projected Percentage of Services Conduct

Online

Per Capita Disposable Income

Company Overview

Macro/Micro
Analysis

Investment Thesis

Catalysts/Risks

Valuation

APPENDIX

Made by Jung-Yung J. Chang

MICROECONOMIC ANALYSIS
Marine Engines

Boat

Sales were up almost

Demand from Ocean and Coastal Transportation
11% year over year with
incremental margins of
32%

Analysis

As such, the expansion of

international sea travel drives
demand for boats and
boating
Bowling
products

many sporting goods wholesalers will enter the

industry and offer fitness equipment as well as
other sporting goods that can integrate well with
these innovative technologies
The continued integration of sporting goods with
innovative technology will increase productivity
and features of the equipment. And therefore
more appealing to consumers
Macro/Micro

Source: IBIS World Reports

The ocean and coastal

transportation industry is
expected to has grown 4.2%
over the past five years and will
continue to grow

The number of fitness applications is expected to

grow to $40.0 million by 2016, compared with $12.0
million in 2010.

Company Overview

Multiple new boat models being

introduced in the next few
weeks at the major winter boat
shows drive market share gains

This quarter was aided

by a favorable warranty
item but for the nearterm, incremental
margins will remain
strong on volume and
driven by new outboard
product
Fitness

SUMMARY

Investment Thesis

Boat Building Market S egmentation; 8%

Defens e Market; 13%

Export Market; 59%

Commercial Market; 21%

and Billiard

In the five years to 2019, per capita Per Capita Disposable Income
disposable income is forecast to rise
at a rate of 2.2% per year

Boat Building Major Market Segmentation

Resulting in increased
disposable income for leisure
activities

Adults aged 20 to 64 comprise the

primary market for pool/billiard halls

An expanding population
within this age group creates
a bigger potential market for
pool and billiard halls
Catalysts/Risks
Valuation

APPENDIX

Made by Jung-Yung J. Chang

INVESTMENT THESIS
Argument I: New Cost Structure

Argument II: Industry Boat Dynamics

Past restructuring and new

initiatives have led to $420MM of
cost savings from 2009 to 2007.
Consolidation of aluminum
manufacturing plants and fiberglass
divestiture
Changes in Bayliner, and divestiture
of Hatteras and Cabo will increase
profitability for boats

Historically low levels of channel

inventory (both new and used)

Manufacturer, dealer, and

wholesaler lenders desire to tightly
control inventories

Limited availability of high quality 34 year old boats -> focus on newer
boats

Aging of US boats (25-30 years)

should limit Pretax
used boat
availability
Increasing
Margins
and
Revenue

Changes to Subordinate Companies

Argument III: International Expansion

Low-cost producer with strong

financial position (low debt, positive
cash flow, undrawn credit, and
wholesale joint venture with GE)

BC has strong industry dealer

network with diverse global sales

Posed to increase international sales

which were 37% of total in 2013

Brazil seen as blue ocean

IBIS World: High and Steady Exports

Exports to:
47%

Total:
$1.5bn

3%
4%
9%
37%

Revenue

SUMMARY

Company Overview

Macro/Micro
Analysis

Source: Equity Research Reports, IBIS World, Google Images (logos)

Pretax Income Margins

Investment Thesis

Catalysts/Risks

Exports To:

Canada

Australia

Mexico

Japan

Other

Valuation

APPENDIX

Made by Jung-Yung J. Chang

CATALYSTS
Winter Appreciation/Boat Show
Feedback
Analyzing past cyclicality, winter has
typically done well. With Brunswick
extensive product launches
combined with strong industry
fundamentals, shares of BC will see
appreciation.

Dealer feedback from upcoming

boat shows have been highly
optimistic. Dealers inventory right
now is fairly empty which should
result in strong pre-order flow.
Historical 3 Year Cyclicality in Stock
Price

New Product Announcements

Major product launch at upcoming

boat shows could increase market
share. Brunswick is releasing the
new Sea Ray 59 luxury yacht and
Boston Whaler 42 Outrage center
console.

Introductions also include expanded

production capacity for Sea Ray 350
SLX dayboat (which was constrained
due to high demand last year)

Release of new economic data such

as housing starts of loosening of
boating credit

Due to Brunswick dependency on

the economy, optimistic economic
reports will increase consumer
income and increase Brunswicks
future performance

Increasing Housing Starts Trend

Described Boats

Mar
1Q
End

Future Economic Reports

Sea Ray 59

Mar
1Q
End

Boston Whaler
42

Mar 1Q
End

Sea Ray 350 SLX

SUMMARY

Company Overview

Macro/Micro
Analysis

Source: Equity Research Reports, Google Images (Pictures), Calculated Risk Blog

Investment Thesis

Catalysts/Risks

Valuation

APPENDIX

Made by Jung-Yung J. Chang

RISKS
Micro-Level

Macro-Level

Labor: 13% of employees are unionized and a change in

relationship could have dire effects

Cyclical demand: Highly susceptible to economy, cost of

capital, and discretionary spending

Customer Concentration: MarineMax is Boat groups

largest dealer with ~17% in 2013. Issues specific to
MarineMax would effect Brunswick

Weather: Marine-related sales are seasonal. Unfavorable

weather patterns during selling seasons affects annual
results

Consumer Tastes: Dependent on consumers preference for

boating. Risk for change to other recreational activities

Commodity and FX fluctuations: High level of

aluminum, steel, and resin-based products. Forex risks
include Euro-CDN. 37% of 2013 sales are outside of US
and much production is done in US.

Steel Commodity Index Sensitivity

Market Risk Sensitivity (SPX Index)

f(x) = 0.31x - 0.2

R = 0.19

SUMMARY

Company Overview

Source: Equity Research Reports, Bloomberg

f(x) = 0.21x + 0.25

R = 0.3

Macro/Micro
Analysis

Investment Thesis

Catalysts/Risks

Valuation

APPENDIX

Made by Jung-Yung J. Chang

VALUATION

PUBLIC COMPANY COMPARABLES

Comparable Companies Sports Goods & Equipment Companies, with Markets Caps Above $2.5B
($ in Millions Except Per Share and Per Unit Data)

SUMMARY

Brunswick is moving towards better margins: EBITDA growth with minimal revenue change
Trading at relative discount to 5 out of 6 metrics highlighted (EV / Rev, EV / EBITDA, P/E) to both median and mean of peer group
P/BV is also trading at discount indicating lower risk than peer group in scenario of liquidation
Around average for margins and slightly below for dividend yield in trailing twelve months

Company Overview

Source: Bloomberg, Capital IQ, Thomson One

Macro/Micro
Analysis

Investment Thesis

Catalysts/Risks

Valuation

APPENDIX

Made by Jung-Yung J. Chang

VALUATION

DISCOUNTED CASH FLOW AND SENSITIVITIES

SUMMARY

Company Overview

Source: Bloomberg, Capital IQ, Thomson One

Macro/Micro
Analysis

Investment Thesis

Catalysts/Risks

Valuation

APPENDIX

Made by Jung-Yung J. Chang

VALUATION

FOOTBALL FIELD VALUATION GRAPH

$46.00

$59.00

DCF Valuation $41.50

$43.08
$38.66

$160.04
$89.31
$57.08

Public Company Comparables

$148.76
$47.10
$47.97

$403.82

$60.58
$70.81

$55.74

$137.00

$58.32

$122.84

Our Target Price:

$55.00
SUMMARY

Company Overview

Source: Bloomberg, Capital IQ, Thomson One

Macro/Micro
Analysis

Investment Thesis

Catalysts/Risks

Valuation

APPENDIX

Made by Jung-Yung J. Chang

RECOMMENDATION

PRICE TARGET AND ANALYST EVALUATIONS

Price-Volume Chart

Analyst Price Targets

59.00

Target Price: $55.00

57.00
55.00
55.00
55.00
54.00

Market Risk Sensitivity

Buy and Sell Recommendations vs Price Targets

Price November 11:

Capital Return:
Dividend Return:
Total Implied Return:

48.64
13.1%
1.1%
14.2%

Target Price

$55.00

Soft Stop-Loss:
Hard Stop-Loss:
Sell

SUMMARY

Hold

Buy

Company Overview

Source: Bloomberg, Capital IQ, Thomson One

Price

$45.00
$40.00

Target Price

Macro/Micro
Analysis

Investment Thesis

Catalysts/Risks

Valuation

APPENDIX

Made by Jung-Yung J. Chang

APPENDIX

FURTHER RISK SENSITIVITIES AS EXPLAINED IN RISK ANALYSIS

Euro-Canadian Currency Sensitivity

Aluminium Commodity Index Sensitivity

f(x) = 0.16x - 0.53

R = 0.15
f(x) = - 0.02x + 0.12
R = 0.01

Resin Commodity Index Sensitivity

Consumer Goods Index (TLT) Sensitivity

BC vs. Resin Commodity Index

f(x) = - 0.1x + 0.08

R = 0.05

SUMMARY

Company Overview

Source: Equity Research Reports, Bloomberg

f(x) = 0.05x - 0.5

R = 0.04

Macro/Micro
Analysis

Investment Thesis

Catalysts/Risks

Valuation

APPENDIX

Made by Jung-Yung J. Chang

APPENDIX

CALCULATIONS FOR COMPS

SUMMARY

Company Overview

Source: Bloomberg, Capital IQ, Thomson One

Macro/Micro
Analysis

Investment Thesis

Catalysts/Risks

Valuation

APPENDIX

Made by Jung-Yung J. Chang

APPENDIX

CALCULATIONS FOR COMPS

SUMMARY

Company Overview

Source: Bloomberg, Capital IQ, Thomson One

Macro/Micro
Analysis

Investment Thesis

Catalysts/Risks

Valuation

APPENDIX

Made by Jung-Yung J. Chang

APPENDIX

CALCULATIONS FOR IMPLIED VALUATION AND CAP TABLE

SUMMARY

Company Overview

Source: Bloomberg, Capital IQ, Thomson One

Macro/Micro
Analysis

Investment Thesis

Catalysts/Risks

Valuation

APPENDIX

Made by Jung-Yung J. Chang

APPENDIX

TOP 20 HOLDERS WITHIN COMPANY AND OWNERSHIP DISTRIBUTION

Ownership Type

Geographic Ownership

Institutional Ownership
Holder Name

5%1%

Position
Change

Position

9.44%

UNITED STAT

7,322,270

-77,195

357,107,108

7.88%

UNITED STAT

7,175,070

-139,926

349,928,164

7.72%

UNITED STAT

VANGUARD GROUP INC

5,638,625

-342,483

274,995,741

6.07%

UNITED STAT

BOSTON PARTNERS

4,246,761

551,442

207,114,534

4.57%

UNITED STAT

WEDGE CAPITAL MANAGE

3,207,069

139,610

156,408,755

3.45%

UNITED STAT

CITADEL ADVISORS LLC

3,196,134

310,953

155,875,455

3.44%

UNITED STAT

STATE STREET CORP

3,110,169

-64,454

151,682,942

3.35%

UNITED STAT

INVESCO LTD

2,653,210

9,295

129,397,052

2.85%

UNITED STAT

FRANKLIN RESOURCES

2,022,695

-50,129

98,646,835

2.18%

UNITED STAT

Ownership (Institutional)

BARROW HANLEY MEWHIN

1,975,709

-68,145

96,355,328

2.13%

UNITED STAT

Ownership (Retail & Other)

DARUMA CAPITAL MANAG

1,972,768

-20,789

96,211,895

2.12%

UNITED STAT

ADAGE CAPITAL PARTNE

1,801,445

705,258

87,856,473

1.94%

UNITED STAT

BANK OF NOVA SCOTIA

1,775,012

1,571,866

86,567,335

1.91%

CHARTWELL INVESTMENT

1,657,209

-33,405

80,822,083

1.78%

UNITED STAT

NORTHERN TRUST CORPO

1,461,843

-177,413

71,294,083

1.57%

UNITED STAT

JP MORGAN CHASE & CO

1,239,107

-748,856

60,431,248

1.33%

UNITED STAT

SCHRODER INVESTMENT

1,191,100

56,800

58,089,947

1.28%

BANK OF NEW YORK MEL

1,152,595

16,593

56,212,058

1.24%

UNITED STAT

MUNDER CAPITAL MANAG

1,081,145

434,722

52,727,442

1.16%

UNITED STAT

12%
83%

92%
94%

Ownership (Insider)

United States

Britain

C anada

Inv estment Adv isor

Hedge Fund Manager

Unknown Country

N orway

Switzerland

Pension Fund (Erisa)

Indiv idual

Japan

Others

Others

Geographic Ownership Distribution

United States

SUMMARY

92.20%

Britain

2.45%

Canada

2.40%

Unknown Country

1.32%

Norway

0.76%

Switzerland

0.39%

Japan

0.18%

Others

0.30%

Company Overview

Source: Bloomberg, Capital IQ, Thomson One

Institutional Ownership Distribution

Investment
Advisor
82.55%
Hedge Fund
Manager
11.66%
Pension Fund
(Erisa)
2.05%
Individual

1.32%

Others

2.41%

Macro/Micro
Analysis

T ROWE PRICE ASSOCIA

BLACKROCK

Country

427,738,894

2% 1% 2%

8,770,533

% of
Ownership

-787,618

2% 2% 1% 1% 0% 0% 0%

FMR LLC

Market Value

Investment Thesis

Catalysts/Risks

Valuation

APPENDIX

Made by Jung-Yung J. Chang

CANADA

BRITAIN

APPENDIX

TOP 5 INSIDERS IN COMPANY MANAGEMENT AND ROLLING RATIOS

Holder Name
MCCOY DUSTAN E
STAYER RALPH C
FERNANDEZ MANUEL A
ARCHIBALD NOLAN D
METZGER WILLIAM L

Position

Position
Change

508,884
90,838
75,339
75,124

% of
Market Value Ownership

1,525
1,787
206

71,787

24,818,273
4,430,169
3,674,283
3,663,797

0.55%
0.10%
0.08%
0.08%

3,501,052

0.08%

EV EBITDA Ratio (Rolling FY1, FY2, FY3)

Price Earnings Ratio (Rolling FY1, FY2, FY3)

P/E FY1

SUMMARY

P/E FY2

Company Overview

Source: Bloomberg, Capital IQ, Thomson One

EV/EBITDA FY1

P/E FY3

Macro/Micro
Analysis

Investment Thesis

Catalysts/Risks

EV/EBITDA FY2

Valuation

EV/EBITDA FY3

APPENDIX

Made by Jung-Yung J. Chang

APPENDIX

ANALYST RATINGS AND GEOGRAPHIC SEGMENTATION

Broker

Recommendati
on
Target

Analyst

BMO Capital Markets

Robert W. Baird & Co
SunTrust Robinson
Humphrey
Wunderlich Securities
RBC Capital Markets
KeyBanc Capital Markets
Raymond James
B Riley & Co
Wells Fargo Securities
Longbow Research
EVA Dimensions

GERRICK L JOHNSON
CRAIG R KENNISON
MICHAEL A SWARTZ
ROMMEL DIONISIO
JOSEPH SPAK
SCOTT W HAMANN
JOSEPH D HOVORKA
JIMMY BAKER
TIMOTHY A CONDER
JAMES L HARDIMAN
CRAIG STERLING

outperform
outperform
buy
buy
sector perform
buy
strong buy
buy
outperform
buy
hold

53.00
54.00
55.00
57.00
46.00
55.00
51.00
59.00
50.00

Date

Date

10-Nov-14 10/31/2014
10-Nov-14 9/30/2014
8/29/2014
4-Nov-14 7/31/2014
29-Oct-14 6/30/2014
24-Oct-14 5/30/2014
24-Oct-14
4/30/2014
24-Oct-14
3/31/2014
24-Oct-14
24-Oct-14 2/28/2014
24-Oct-14 1/31/2014
6-Aug-14 12/31/2013
11/29/2013

Geographic Segments in USD

United States
Europe
Canada
Pacific Rim
Latin America
Africa & Middle East

(2013)

Buy

Hold

Sell

83%
83%
83%
83%
75%
75%
75%
75%
75%
67%
67%
67%

17%
17%
17%
17%
25%
25%
25%
25%
25%
33%
25%
25%

0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
8%
8%

6%2%
8%
8%

13%

Sales (M)

63%

United States

2458
499
322
293
226
90

Europe
Canada
Pacific Rim
Latin America
Africa & Middle East

SUMMARY

Company Overview

Source: Bloomberg, Capital IQ, Thomson One

Macro/Micro
Analysis

Investment Thesis

Catalysts/Risks

Valuation

APPENDIX

Made by Jung-Yung J. Chang