"Demand for new boats is extremely poor," said Ed Aaron, RBC's director of equity research, in the report.
Nearly 35 percent of dealers reported that new boat sales are declining by 30 percent or more, supporting RBC's view that the market was down 25 to 30 percent in the second quarter. The used market is holding up much better in relative terms, according to the investment firm.
"Dealers attribute energy and consumer confidence issues as the primary reasons for the weakness, but also expressed concern over the financing environment," said Aaron.
Inventory is still a problem, he continued. Dealers expressed concern with the overall level and, to a greater extent, the aging of their inventory. Aaron said dealers did not indicate a significant amount of promotional assistance from manufacturers, supporting RBC's view that Brunswick and other manufacturers are adjusting primarily through production.
Also, most dealers are cautious in the short term and are planning to react by significantly reducing orders, lowering prices and cutting expenses. Dealers are uncertain whether the market will recover next spring.
Over the longer term, sentiment towards the business varied widely, according to Aaron. Some dealers believe the current downturn is temporary, whereas others fear the market could be permanently impaired for structural reasons, most notably the prohibitive cost of owning and operating a boat.
As for Brunswick Corp. and MarineMax, the two publicly traded marine companies that RBC follows, the investment firm expressed confidence in the liquidity of both companies.
RBC analysts said they were encouraged by Brunswick's recently announced restructuring plan, which the analysts said should ensure solid profitability by 2010 without assuming an industry recovery. They also said they were not concerned with the subsequent debt rating downgrades, given the company's "solid liquidity position and consistently positive free cash flow generation."
On MarineMax, RBC analysts said, "While we expect MarineMax to report very weak numbers - possibly including impairment charges - and potentially violate a debt covenant, we see a very low probability of serious liquidity risk. Even with a poor earnings release, clarification of this issue could bring some short-term relief to the stock."
