BRUNSWICK (BC)

[victor]

Hello all,

Hello Bill. Following your steps (I liked very much the Piotroski paper you suggested) I'm doing some valuations of several firms. You know, it's just trainning. Right or wrong, I still believe that in the following years we will be able to buy cheaper than now.

In one of those trainings I've found Brunswick Corp (BC). Here is the summary:

Insiders are selling. The company is not buying-back shares, in fact they are issuing new shares on a regular basis. Institutionals own more than 85% leaving few room to grateful surprises.
...anyone still interested in wasting his/her time reading this?



Thanks for those who are still with me. I follow.
1) The company has a solid brand. Or I think so (sorry but I'm not living in the States. Can anyone confirm that?)
2) ROA, ROE and CFO have been growing on a regular basis (I'm not going to bother you with all the figures. If you want to check the full homework e-mail me at victorpla@ya.com and I'll send you the spreadsheet).
3) Margins aren't bad and are growing, as well. CFO is wider than net income and improving.
4) Sales are growing as well, and what I believe interesting, inventory+accounts receivable grow slower than revenues. Interest expenses also grow slower than sales. Both items remind me the word efficiency, this is probably wider margins/better ROE's in the future.
6) Debt and liabilities don't look like a problem. (Debt/assets 0.16, current ratio 1.81)
5) Finally, the company is not expensive. P/E is about 10-11. And PEG (price earnings/expected growth), which I believe is a good proxy for future returns despite I don't like to use expected figures, is well below the benchmark of 1.0.

So, a solid company with a)good financials, b)a good earnings track record, c)solid brand (maybe market leader, I don't know I don't live here) and d) a promising future and e) a reasonable prices.

I still don't know why the price has fallen in the recent months. Now, I'm with their reports to the SEC, I'll will update if I find something nasty.

Hopefully, you will be braver than I am and will press the BUY BUTTON. Good luck.

Cheers.

Víctor.

[victor]

Thanks very much Bill, I'll be thinking about it.

[nodoodahs]

Victor,

3, 4, and 6 are questionable to me.

Every company accrues expenses and most shenanigans involving "earnings smoothing" take place with accruals. That's why I look at the size of accruals and changes in patterns of accruals, and in this case BC went from OCF well exceeding NI to the opposite in one year. You say a "partner company" and I wonder what the actual relationship is. Let's put it this way ... if I had a partner company that pretty much did nothing but buy my receivables, would you do business with me? What is the partner company and what business (if any) do they do with other companies besides BC? Is this partner a "special purpose entity?"

How much from each category? How much business is international for the FOREX? Is the company engaging in a "side business" of investments and why? I mean, this isn't an insurer or a bank, this is a manufacturer of recreational products, why do they even need to be investing in derivatives and playing the FOREX market?

You can expand the valuation ratios by the exercisable options outstanding i.e. a 20 PE just became 21.

The buy-back may be just closing out the options and not an actual buy-back of existing shares.

I'll leave the math on BC to you ...
_________________
I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[victor]

Hello,

Bill, thank you for the links.

Definitively I changed my mind about BC. However I will try to finish the work and see if can learn something.

I have more questions, but I feel I'm going too far stealing your time, So feel free to not to answer. Believe me: no complaints, no regrets.
My questions (data from 10-Q filling 1Q05):

Are this red flags? Or, are all this items common in a company of that size?

1) To have a dispute with a chinese supplier. (the company doesn't estimate its cost)
2) To have another dispute with the US Tax Court. (the company says it's over. They probably may agree a settlement with no extra cost)
3) To sell most of its receivables to a partner company. This is the reason of the huge amount you see in "Other current liabilities". They are accrued expenses. (Question: accounting for dummies. When you sell a receivable you get cash against acrrued expenses. When your customer pays you settle accounts receivable against accrued expenses. Am I right? )
4) To have a loss of 20.5 million in 1Q05 (about 1/4 of income) due to: FOREX, investments and derivatives.
5) To have a planned pension plan other retirement benefits with its employees.
6) To have 4.4million stock options outstanding, about 4.5% of all the shares.

Finally, the company has agreed to buy-back shares for 200million against cash. (3-4 years time)

Second question:
The "other not cash items" outflow in 1Q05 is due to: changes in Workcap (213.1) and other (20.5).
But here arises another question. I'm somewhat a "number freakie", I mean I cannot sleep well when I see 2+2=5.
Regarding change in working capital we have (annual data 2003-2004):

Balance Sheet 2004 2003 +/-
Receivables 463.2 374.4 +88.8
Inventories 786.8 623.8 +163.0
Other Assets 348.9 371.1 -22.2

Accounts pay. 387.9 321.3 +66.6
ST Debt 10.7 23.8 -13.1
Other liab. 855.2 756.7 +98.5

Then in the cash flow, we have:

Increase in receivables 79.8 (vs 88.8 )
Increase in inventories 122.8 (vs 163.0)
Decrease in other 8.2 (vs. 22.2)

Decrease in payables 42.5 (vs. Increase 66.6)
Decrease in other 133.3 (vs -13.1+98.5)

Overall, acording to the balance sheet I have a decrease in WK of 77.6 vs a decrease of 18.6 in the cash flow statement.
What am I doing wrong?

[nodoodahs]

http://www.nysscpa.org/cpajournal/2002/0102/features/f013602.htm
Some analysts refer to free cash flow (FCF) as a basis for measuring a company's ability to meet continuing capital requirements. Others argue that FCF should represent the cash available after meeting all current commitments, that is, required payments made to continue operations (including dividends, current debt repayment, and regular capital reinvestment to maintain current operating activities). Still others argue that FCF should represent the cash available after meeting operating expenses, including working capital additions and the cost of maintaining operating assets. This approach defines FCF as "CFO minus capital maintenance expenditures." International Accounting Standard (IAS) 7 recommends that FCF should be recognized as "cash from operations less the amount of capital expenditures required to maintain the firm's present productive capacity." Using this description, dividends and mandatory debt payments would not be subtracted to arrive at FCF. Thus, using this description, discretionary cash expenditures would include growth-oriented capital expenditures and acquisitions, debt reduction, dividends, and stock repurchases.

IAS 7 implies a capital maintenance approach; that is, capital expenditures should only represent those expenditures necessary to maintain the company's operational assets. Expenditures beyond this amount should represent discretionary expenditures. To compensate for the lack of normal capital expenditure information, many analysts use total capital expenditures, thus generally understating FCF.

Some regulatory agencies use FCF as a measuring tool. These agencies use a percentage of sales or assets to represent a surrogate capital maintenance expenditure amount. The New Jersey Gaming Commission, for example, uses FCF in its financial viability analysis and defines capital maintenance as "five percent of net revenues."
Click the link for sidebar #2 at the bottom of the page for discussion of some of the inconsistencies in application of FCF definition.

http://www.investorwords.com/2084/free_cash_flow.html
http://www.moneychimp.com/glossary/free_cash_flow.htm

Regardless of exactly how you define it, the concept of leftover cash once capx is accounted for is useful to determine if the company is or can generate cash to be used for business expansion ...

http://moneycentral.msn.com/content/Investing/Simplestrategies/P94088.asp
_________________
I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[victor]

Thanks for being my(our) teachers, I owe you several meals.

Since my first post I've been reading the footnotes and watching closely the numbers and I'm making up my mind.

True, CFO<NI the last quarters. And I knew the brand form bowling which accounts just for 7.5% of all sales and 6.0% of earnings. So, forget the "Strong Brand". Most of its revenue comes from boats and boat engines. I still don't know what are the 233 million outflow in 1Q05, but it doesn't smell fine.

I have to ask you for help, just to don't be fooled with my own numbers.

About the cash flows. I use money.msm data, there I read:

Net cash from Operating Activities: 111.4
Net cash from Investing Activities: -111.2
Net cash from Financing Activities: 8.6

If I add up all those I get 8.8, which is "Net Change in Cash & Cash Equivalents", ok.

But then, what is "Free Cash Flow=(62.7)"? (sigh, another meal)

[HenryTo]

Victor,

Re: brand name. I agree with Bill here - there just isn't too much of a brand name recognition in Brunswick. Somehow, it looked familar to me when you first mentioned it - and I couldn't pin it down until Bill mentioned bowling. And I hardly bowl anymore...

Henry

[nodoodahs]

Check the quarterly OCF vs NI, where for 2005 YTD NI is almost double OCF. Also, what is the content of the "other cash items" minus 233 million in 1Q 2005 on the cash flow statement?

Lots of debt and stock issuance for a positive cash flow from financing, which is a reversal from the prior years.

Free cash flow turned negative in 2004 and continues in 2005 as negative.

I'm only familiar with their brand re: bowling and pool (billiards). I don't know anything about their fitness machine or marine motor business and wouldn't recognize brand quality in those businesses if it slapped, I don't boat. Not trying to dis' the stock or your analysis but think that these may be things to investigate.

Price action may just be institutional and other players making bets that this sector will decline from a macro-economic perspective - do you believe that as well?
_________________
I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.