Sluggish sales of off-road vehicles, motorcycles, and snowmobiles have the powersports industry making a splash buying boats to spur growth. Canada-based BRP (NASDAQ: DOOO) recently added another manufacturer to its fleet with the acquisition of Telwater, an aluminum boat and trailer maker in Australia.
Although BRP has been in the game for a while with its Sea-Doo personal watercraft division, both it and rival Polaris Industries (NYSE: PII) dived head-first into the boating market last year by buying pontoon- and fishing-boat manufacturers. This latest acquisition from Down Under suggests the next purchases may be made overseas.
A partnership leads to an acquisition
BRP is acquiring 80% of Telwater's outstanding stock with the remaining 20% to be held by Paul Phelan, the boat maker's current owner and managing director. The two companies have had a relationship since 2011 when Telwater signed on as a distribution partner for BRP's boats and trailers, and later agreed to distribute BRP's Evinrude marine engines.
The driving force behind those early partnership agreements, and now the acquisition, is that Telwater is Australia's largest aluminium boat manufacturer. It produces over 8,000 boats and 5,500 trailers annually and has a dealer network across the country. It will join Evinrude in BRP's marine group as an independent product line along with Alumacraft and Manitou, the two boat makers BRP purchased last year
In the release announcing the purchase, BRP president and CEO Jose Boisjoli said, "'This is one more piece of the puzzle in our strategy to transform the marine industry and a chance for us to further our goal of becoming a leading global marine company by investing in the current leader in this region."
Bypassing a trade war
BRP has been beating its rivals in most markets. Sales of off-road vehicles like ATVs and side-by-sides rose by double digits in its fiscal fourth quarter, while Polaris saw retail sales fall by the mid single digits. Polaris did come out on top in snowmobile sales and grew its market share in the category, but both companies see a clear way forward in the boating industry.
Polaris benefited from the $185 million contribution in sales that pontoon-boat maker Boat Holdings made in the period. Polaris expects the acquisition to contribute about 6 percentage points of the 11% to 13% growth in revenue that it forecasts for the segment in 2019. Earlier this year, it bought fishing-boat maker Larson Boats. BRP is also expecting its Alumacraft and Manitou acquisitions to help the segment increase revenue by 15% to 20% this year.
Trade war fallout
An international acquisition would make even more sense for Polaris. Its earnings have been socked by tariffs on aluminum and steel. Now that the U.S. and China have ratcheted up the trade war with additional tariffs on each other's products, finding a boat manufacturer in another country would help bypass those costs.
Polaris CEO Scott Wine said his company's costs would hit nearly $200 million this year, an $80 million increase, because of the new tariffs. The trade war turning hot again has him seriously considering moving jobs to Mexico. Being a Canadian company, BRP isn't caught up in that fight, but nevertheless already makes some of its vehicles in Mexico, where it recently completed a capacity expansion.
While Polaris previously began moving some motorcycle production from Iowa to Poland due to rising tariffs, boats are also a big user of aluminum and finding an international manufacturer to acquire may be a way to evade the elevated duties on this business too.
The key takeaway
North America is the world's largest boating market, primarily driven by sales in the U.S., followed distantly by Europe. The Asia-Pacific region has an almost negligible share of the boating market, but industry analysts forecast it will experience the fastest growth anywhere over the next five years.
By buying Australia's biggest boat maker, BRP positions itself to capture a larger share of the market and give it a competitive edge over its powersports industry rivals that are hampered by the U.S.-China trade war. It also suggests we'll see more of them looking overseas as well for acquisitions as a means of reviving their own growth prospects.
10 stocks we like better than BRP Inc.When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*
David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and BRP Inc. wasn't one of them! That's right -- they think these 10 stocks are even better buys.
*Stock Advisor returns as of March 1, 2019