Published: December 15, 2008

Brunswick (NYSE: BC, $3.37) originated in 1845 as a maker of fine billiards equipment. Over a century-and-a-half later, the company's pool tables are still highly regarded, and its family bowling centers can be found in over 100 locations throughout North America and Europe. Meanwhile, it has also picked up several new product lines along the way.

First, the firm's Mercury plant in Wisconsin is the world's leading manufacturer of marine outboard and inboard engines. And its fitness division is a top supplier of treadmills, free weights and other exercise equipment to commercial customers such as health clubs and professional sports teams. But boats are what really put the wind behind Brunswick's sails.

Brunswick is one of the world's largest boat manufacturers, with a portfolio encompassing more than 40 different brands, including Triton, Lowe, and Bayliner. The company sells everything from 10-foot aluminum fishing boats to sleek 100-foot pleasure yachts with granite wet bars and plasma TVs.

As you might expect given tighter access to credit and slack demand for big-ticket goods, Brunswick is facing some stiff headwinds. In fact, the company just reported a -22% drop in third quarter sales, led by a steep -36% decline in the boat segment.

Meanwhile, operating earnings (excluding one-time charges) added up to a loss of -$0.33 per share, versus a gain of $0.19 per share this time last year. And with demand down -40% at the retail level, inventory is piling up, and things don't look to get significantly better in the immediate future.

Fortunately, that's exactly why I'm interested. When demand falls off, the best way to protect earnings is to tighten the belt and reduce fixed costs. And the company has already announced plans to shutter 12 plants, which will help shave $300 million in annual expenses by the end of next year. To put that figure in context, profits totaled $111 million for all of fiscal 2007.

On the latest conference call, CEO Dusty McCoy pointed out that these cost reductions will position Brunswick to remain free cash flow positive at sales levels as low as $4.5 billion -- $1 billion or so below what the company took in last year.

Of course, there are still risks involved. Like many other companies, Brunswick's debt has just been downgraded -- which will raise borrowing costs on $250 million worth of recently issued notes. Furthermore, the balance sheet has been marred by recent asset write-downs.

But the good news is that both of these concerns are already out in the open -- rather than lurking as potential hazards. Plus, the -85% plunge in the stock means that investors are already expecting the worst. With the bar set this low, any earnings surprises are more likely to be to the upside rather than the downside -- particularly as we begin to overlap weak periods that will make for favorable year-over-year comparisons.

After this sell-off, the entire company can now be had for around $290 million -- about one-twentieth of last year's $5.6 billion in revenues. It's not often you run across a market-share leader in four different industries trading at just 0.05 times sales and 2.4 times trailing cash flows. The last time you could pick up the shares this cheap, it was 1983 and the Dow Jones had closed above the 1,100 mark for the first time.

There's no doubt that Brunswick is facing a difficult operating environment. But don't make the mistake of assuming that today's conditions will extend in a straight line forever. It may not be next month, or even next year, but at some point the economy will recuperate and consumers will again have a hearty appetite for bass boats, ski boats, party barges and other recreational water toys.

In the meantime, this is a resilient company that weathered the Great Depression, and I think it will emerge from this downturn leaner and in a better competitive position than ever.

The market's decision to pummel BC has been right in direction, but wrong in magnitude. Yes, cash flows are likely to remain weak for the time being. However, a company's value isn't tied to what happens over the next few quarters, but what it can generate for shareholders years into the future.

I still see a company with dominant brands, entrenched customer relationships, and good growth prospects overseas. The firm has posted 10 consecutive years of healthy profits, and deep cutbacks could lead to record earnings once business picks back up.

Even at just 50% of its former production capacity, Brunswick is still sharply undervalued at this level. Given deteriorating conditions and potential loan covenant breaches, the stock is better suited to aggressive investors.

But even if the shares retrace just half of their losses and climb back to $12 , investors could nearly triple their money.

Nathan Slaughter
Editor
Half-Priced Stocks

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About Nathan Slaughter

Nathan Slaughter has developed a long and successful track record over the years by investing primarily in deeply discounted securities. He uses advanced discounted cash flow techniques, along with a host of fundamental research, to uncover quality stocks that are trading well below their actual intrinsic value.

Nathan's previous experience includes a long tenure at AXA/Equitable Advisors, where he provided comprehensive investment advisory services to small businesses and high net-worth clients. He also honed his research skills at Morgan Keegan, where he performed asset allocation, retirement planning, and consultative portfolio management services.

Several years ago Nathan switched gears and decided to devote his time exclusively to financial analysis and writing. He has since published hundreds of articles for a variety of prominent online and print publications, and he now writes exclusively for StreetAuthority.com.

Nathan's educational background includes NASD series 6, 7, 63, & 65 certifications, as well as a degree in Finance/Investment Management. He currently resides in Shreveport, LA with wife Julie and sons Aidan and Riley. 

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