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Sink or Swim: Marine industry options play

Posted May 2, 2008

“Needless to say, soaring prices at the pump are killing the company’s bottom line.  Its first-quarter earnings statement was dismal.  Profits dropped by over 70%.  The pain is just getting started. ” - Andrew Snyder

By Andrew Snyder

Baltimore (TFN)- Sometimes it is hard not to get attached to an industry.  As the economy slows and takes it to new lows, it can feel quite personal.  If not properly managed, an intimate connection to an industry can be detrimental to a portfolio. It can also be a great moneymaking tool.

All of my life, I have been connected to the boating industry.  From the first time I shot across the bay in a 12-foot aluminum skiff to the day I finally backed my own sportfish into its slip, boating has been a major part of my life.  So when I see some of the nation’s best boat builders and marine-industry manufacturers having a rough go of things, it hurts.

But I also see lots of profit potential. 

Man the life rafts

Almost everywhere I look, boaters are scrambling to get out of the water.  Fuel prices are making it a rich-man’s sport.  Boats are for sale.  Docks are for rent.  And the industry that supports it all is going under.

One of the largest players in the boating industry is Brunswick (BC:NYSE).  While it is also in the exercise, billiards, and bowling industries, its marine offerings play a huge role in its annual earnings.  The company manufactures boats of all types and sizes and also develops and makes the propulsion systems that go in them. 

Needless to say, soaring prices at the pump are killing the company’s bottom line.  Its first-quarter earnings statement was dismal.  Profits dropped by over 70%.  The pain is just getting started. 

As the year wears on, the notion of a profit will certainly disappear.  In anticipation of dismal earnings, the company has already begun manufacturing consolidation and production cuts.  In other words, welcome to the unemployment line.

Obviously, I am not the only one that sees tough times ahead for this $1.5 billion company.  Its share price has been cut in half over the last twelve months.  But investors are scared to push it any lower…. at least for now. 

When the company’s second-quarter earnings hit The Street, today’s prices are going to look sky high. This industry has much, much more pain to endure.

Turnaround is not an option

That means options investors have a great profit opportunity in front of them.  Right now, share price is just above $17.  It is riding high because the company actually beat its Q1 forecasts.  The jubilation will not last.  That is what makes this a fantastic opportunity for shorts.

Once share price begins to fall, it will keep on sinking.  For risk-sensitive investors, the Brunswick June 15 Puts (BCRC.X) are a good option.  But if share price hits $15, it will drop like a rock.  That makes the June 12.50 Puts (BCRV.X) a good play for investors that can handle a bit more risk.  Believe me, the returns on that play could be astronomical.  Brunswick will not be celebrating its profitability anytime soon.

It is unfortunate high fuel prices and a dragging economy are taking this industry down, but as investors we cannot let our emotions rule.  You have to do what you have to do.  And we have to make money. 


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Posted by Andrew Snyder · Filed Under US Stocks and Markets 

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