“We can say without reservation that, in investing, spinoffs are the closest thing you can find to a sure thing. It all comes down to the incentives when companies spin off a subsidiary or division and hand out shares to their shareholders. Study after study has shown that after an initial adjustment period of a few months, spinoffs tend to outperform groups of comparable stocks for several years….” Pat McKeough shows how spinoffs and other “special situations” can create windfalls for informed investors.
BRUNSWICK CORP. $49(New York symbol BC; Manufacturing & Industry sector; Shares outstanding: 86.7 million; Market cap: $4.2 billion; Dividend yield: 1.7%; Takeover Target Rating: Medium; www.brunswick.com) is a leading maker of leisure and recreational products. Its lines include Life Fitness and Hammer Strength exercise equipment; Sea Ray, Bayliner, and Boston Whaler boats; and Mercury, Mariner, and MerCruiser engines. Brunswick Billiards is among its other brands.
In 2014 and 2015, the company sold its bowling-related operations (bowling centres as well as products such as bowling balls and pins). If you exclude those businesses, Brunswick’s sales rose 33.4%, from $3.38 billion in 2013 to $4.51 billion in 2017.
Brunswick Corp.:
Founded in 1845 by John Brunswick as a maker of billiard tables
In 1961, Brunswick acquired the maker of Mercury Marine equipment
Sells its products through 16,000 dealers in 130 countries
Earnings from ongoing operations fell 74.9%, from $779.0 million in 2013 to $195.5 million in 2014. That’s mainly because the 2013 results included a $599.5 million tax benefit. Per-share earnings fell 75.2%, from $8.30 to $2.06, on more shares outstanding.
Brunswick’s earnings then improved to $2.45 a share (or a total of $230.9 million) in 2015, and rose again to $2.96 a share (or $272.6 million) in 2016. However, earnings fell to $2.08 a share (or $187.3 million) in 2017 due to $61.8 million in charges related to new U.S. tax rules. Excluding unusual items, earnings per share in fact gained 12.4%, from $3.46 in 2016 to $3.89 in 2017.
In August 2018, Brunswick paid $910.0 million for the Global Marine Business of Power Products Holdings. That business makes electrical parts, such as lighting, wires, cables and switches, for boats.
In the quarter ended September 29, 2018, Brunswick’s sales rose 13.7%, to $1.30 billion from $1.14 billion a year earlier. That’s mainly due to strong seasonal demand for outboard motors and other boating products. However, earnings fell 11.4%, to $70.0 million from $79.0 million; per-share earnings declined 9.1%, to $0.80 from $0.88, on fewer shares outstanding. Factoring out unusual items, per-share earnings jumped 30.6%, to $1.28 from $0.98.
Brunswick holds cash of $302.4 million, and its long-term debt of $891.0 million is 21% of its market cap.
Under pressure from Owl Creek, a New York-based hedge fund that owns 2.5% of the company, Brunswick has announced that it will spin off its fitness business.
The new firm—to be called Life Fitness Holdings—will focus on cardiovascular and strength training equipment, including stationary bikes used for group spinning classes. Those products are sold under the Life Fitness, Hammer Strength, Cybex, Indoor Cycling Group and SCIFIT brands. Brunswick’s billiards business will also transfer to the spinoff. In the latest quarter, fitness operations (excluding billiards) contributed 20% of revenue and 7% of profits.
Brunswick has yet to announce the details of the spinoff, except that it will retain 20% of Life Fitness. It plans to either sell that remaining stake within the first two years after the split or hand them out to its investors. The company also expects to complete the spinoff in the first quarter of 2019.
The split will let Brunswick focus on its more-profitable boating operations. However, demand for those products could suffer if the U.S. economy slows. That’s why the stock trades at a low 9.4 times Brunswick’s projected 2019 earnings of $5.23 a share. The $0.84 dividend yields 1.7%.
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