NAFTA threats a ‘big cloud’: BRP CEO

U. S. president- elect Donald Trump’s threat to tear up the North American Free Trade Agreement is a “big, dark cloud above our heads,” according to the chief executive of snowmobile- maker BRP Inc., which recently opened a new plant in Mexico.

But investors don’t appear to see it that way, sending shares of BRP up 9.6 per cent to $28.21 Friday.

BRP’s revenue, which jumped seven per cent to $ 1.08 billion, was boosted by strong sales of Can- Am off- road vehicles following the introduction of two new products. This helped to offset a decline in snowmobile sales, which were affected by a slow production ramp- up. Adjusted earnings per share jumped 50 per cent to $0.93, well ahead of the $ 0.75 expected by analysts.

BRP, which was spun off from Bombardier Inc. in 2003, also boosted its fullyear guidance on a stronger sales outlook for all its divisions except parts, accessories and clothing.

The company now expects full-year revenue to rise five to nine per cent, up from an earlier forecast of four to eight per cent, and sees adjusted earnings per share coming in at $ 1.86 to $ 1.96, up from earlier guidance of $1.82 to $1.92.

But chief executive José Boisjoli sounded a cautionary note about the uncertainty created by Trump’s election and his opposition to NAFTA, which the president- elect has called “the worst trade deal maybe ever signed anywhere.”

Valcourt, Que.-based BRP has three manufacturing facilities in Mexico, including one in Juarez that just opened in April.

“Obviously I think the big, dark cloud above our heads is everything related to NAFTA,” Boisjoli said on a conference call Friday.

BRP has just over $ 1 billion in trading volume between Mexico and the U. S. If Trump pulls the U. S. out of NAFTA, he would have to give six months’ notice and then exports from Mexico would be taxed according to “most favoured nation” tariffs, which are between 1.4 and 2.9 per cent. That would cost BRP approximately $20 million to $25 million a year, which “we could manage,” Boisjoli said.

“Some of it could be passed down to the suppliers, some of it passed ( to customers) through pricing increases,” he said, adding that he would not consider pulling out of Mexico entirely.

“Being in Mexico with access to a skilled labour force, obviously there’s a cost advantage there, but also having access to the supply base in Mexico is very beneficial to us.”

National Bank analyst Cameron Doerksen increased his price target for BRP shares to $ 30 from $ 28 and maintained his outperform rating, arguing that marketshare gains will help offset any uncertainty about the situation in Mexico.

“While the risk of significant tariffs on power- sports vehicles imported into the U.S. from Mexico is probably low, until there is more clarity upside for the stock may be more limited,” Doerksen wrote.