Bombardier Recreation Products is no stranger to MarkertScreener readers, as its situation was already discussed in these same columns a few months ago. At that time, we pointed out that in ten years, the group had tripled its sales and increased its earnings per share tenfold, while returning all the free cash flow generated over the period to its shareholders.
On paper, the valuation at the time - ten times earnings, compared with less than eight times earnings today - may have seemed unworthy of a fast-growing business with such high profitability. In reality, it reflected the timidity of investors anticipating a sharp contraction in demand.
They were right. The contraction is here to stay, with full-year sales up a very slight 3%, but earnings per share down 11%. The trend reversal was most pronounced in the fourth quarter, with sales plummeting in all catalog segments except quads and buggies, and earnings per share halved compared to the last quarter of the previous year.
Symptomatic of a sharply declining business, free cash flow reached an all-time high of over $1 billion for the year, thanks to lower inventories and working capital requirements. As usual, half of this free cash flow was returned to shareholders, mainly via a new share buyback which reduced the number of shares in circulation by a further 6% over twelve months.
BRP is a veritable "cannibal", having already delisted a third of its outstanding shares over the last ten years through share buy-backs. This management strategy is the right one, all the more so as these operations have been carried out at generally attractive valuation multiples.
The difficulty lies in normalizing earnings per share over the cycle. The economic contraction in Canada is a relatively recent phenomenon, but one of extreme brutality. In Western Canada, for example, the number of bankruptcies among small and medium-sized businesses has suddenly soared to levels reminiscent of the disastrous 2007-2008 period.