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January 27, 2006

Brunswick shares tumble 13 per cent on softer marine outlook for '06

he company, saying it expects a softer market in marine sales for 2006

Courtesy of IBI Magazine/Michael Verdon

Despite reporting record sales and earnings for 2005, Brunswick Corp. shares tumbled 13 percent yesterday. The company, saying it expects a softer market in marine sales for 2006, expects its per-share earnings for 2006 to be in the range of US$3.25 to US$3.45, below the US$3.89 that analysts had been expecting.

Its share price dropped to a 52-week low yesterday, at one point reaching $34.00. It opened today at US$36.25. Its 52-week high was last April 7th, when the stock reached US$49.77.

Reactions from analysts were mixed.

"We believe the story has changed significantly - what is in part an ongoing turnaround story involving a 'reinvention' of the boating industry was supposed to drive significant margin expansion and earnings growth, and it appears that will not be the case this late into cycle," wrote Goldman Sachs analyst Jonathan Shapiro in a Thursday note. Shapiro downgraded the stock to Neutral from Outperform. "We do not believe investors were paying for top-line acceleration. That said, without margin expansion and with a potential slowdown in U.S. consumer [spending] not even in the numbers, we believe it is difficult to make a compelling argument for owning the shares."

Gary Cooper, an analyst at Banc of America Securities, retained his "neutral" rating on Brunswick, despite his belief that Sea Ray sales were off. "We believe Sea-Ray sales likely declined in 4Q05," he wrote. "MarineMax reported Dec-05 quarterly results earlier today. (We believe Sea-Ray is HZO's largest brand and accounts for about 50% of HZO's sales.) Same-store sales fell -3.6% as a result of the impact of Hurricane Wilma in the Florida region. Inventory grew to $388 million, with days of supply growing to 255 days from 213 days a year ago and 174 days in the prior quarter." MarineMax shares dropped 4.5 per cent in value on Thursday.

But Cooper wrote that, despite 2006 "shaping up to be a tough year," for the leisure industry, the stock looks more attractive with its lower P/E multiple and higher potential for back-end earnings than others in its Powersports Group, Harley-Davidson and Polaris.

Ed Aaron of RBC Capital Markets retained his "Outperform" rating despite lowering Brunswick's price target. "Based on the current direction of consumer spending and interest rates, it's admittedly tough to believe the stars are aligned for a near-term cyclical move in boating stocks," he wrote. "That said, with BC shares trading at 11x significantly reduced numbers, we believe the more challenging outlook is fully reflected in the stock and we continue to see good long-term value in the story. We are therefore maintaining our Outperform rating as we await Further indications of retail demand this boating season. We are lowering our price target to $42 from $46."

The stock opened today at US$36.25 and at 11:00 EST was trading at $36.30.