BRP Delivers Additional Market Share Gains, Displaying Brand Prowess; Shares Attractive

We don’t plan any material change to our CAD 136 ($101) fair value estimate for BRP DOO after incorporating better-than-expected fourth-quarter results and tamer-than-projected fiscal 2024 expectations into our model. We view shares as undervalued, trading at a more than 20% discount.

Fourth-quarter sales growth of 31%, to CAD 3.1 billion, was ahead of our 23% forecast, as capacity at Juarez-3 came online and the supply chain continued to decompress, allowing substantially completed units available for retail to be finished. Solid throughput allowed BRP to grab market share in all categories it operates within, capturing 19% retail sales growth in the key North America market in an industry that declined at a low-single-digit rate. We expect some share gains to cede as supply chain constraints ease, providing more stable footing to peers in the powersports industry that may have faced lumpy product delivery timelines recently.

From a profit perspective, the gross margin was 80 basis points worse than we modeled, at 25.6%, impacted by logistic, commodity, and labor costs that more than offset price increases. The operating expense margin was flat year over year, at 11%, as scale gains were offset by reinvestment into the brand (sales, marketing, R&D), factors we think are key in maintaining the firm’s narrow moat status.

However, a strong close to 2023 was offset by 2024 guidance that included sales growth of 9%-12% (a bit below our 15% projection) and CAD 1.35 per share in higher depreciation and interest expense costs. Ultimately, these factors are set to generate EPS of CAD 12.25-CAD 12.75, representing a mid-single-digit EPS growth rate, below the CAD 13.28 in 2024 EPS we thought BRP could achieve. According to the company, the limited upside in 2024 EPS shouldn’t jeopardize its ability to achieve its fiscal 2025 plan to capture CAD 13.50-CAD 14.50 in EPS—in line with the EPS of CAD 14.22 in our model.