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From the Survey: Polaris
Polaris Industries (PII) is a small vehicles manufacturer with dealers located in the United States, Canada, and Europe. Its product lines include all-terrain vehicles, snowmobiles, and motorcycles, all of which Polaris designs, engineers, and manufactures. Off-road vehicles (ORVs) make up the majority of sales, accounting for 69% in 2012. Over the last few years, hefty share-price gains exemplify the high level of execution the company is attaining.
About 4% of revenues are targeted to be used in R&D every year. Lately, much of that has gone into the relaunch of the seminal Indian Motorcycle brand. Initially, Indian was making motorcycles from 1901 to 1953, marking it as America’s oldest motorcycle company. For several decades in the first half of the 20th century, Indian competed with Harley Davidson (HOG). Since declaring bankruptcy in 1953, various companies have held interests in the Indian trademark and spatterings of new vehicles were offered. Most of these attempts failed to achieve material success.
Polaris hopes to change that this time around. With the acquisition of the Indian brand in 2011 and subsequent relaunch in 2013, it aims to encroach on Harley Davidson’s dominant market position. The company appears very confident the investments revitalizing the iconic brand will pay off. Reviews and early reception to the three new bikes have been overwhelmingly positive. How much the new Indian line bears fruit remains to be seen, but without question, the relic seems to be gaining more traction than was the case over the last six decades. Last quarter, motorcycle sales (including the Victory line) were down, mostly due to weaker demand in Europe, but Indian is just starting to rev up. We expect sales to turn the corner in 2014, or perhaps even as early as the final quarter of this year.
On the other side of Polaris’ product line are the well-known ORV offerings. Some competitors, such as Arctic Cat (ACAT), trade at a discount relative to PII, but Polaris is justifying its premium valuation. Whereas ACAT underperformed in its most recent quarter due to disappointing all-terrain vehicle sales in North America and Europe, causing share net to shrink 6%, Polaris rolled right along, growing earnings by 23%. This is nothing new for Polaris. Annual bottom-line growth over the past few years has been excellent (rising 50% in 2011 and 38% in 2012). With one quarter yet to be reported this year, we believe share net will advance notably again. In 2010, the shares drove into new all-time high territory and have barely looked back since. Earnings have topped prior-year comps in each quarter for over three years running, and we think that will hold true next year as well.
Despite consistent rock-solid double-digit advances, there is some top - and bottom -line growth deceleration. But margins continue to gradually rise, in spite of investment expenses. As a new year fast approaches, these shares have only picked up steam.
No doubt, the price-to-earnings multiple has expanded. Yes, multiple compression is possible, and although the company has had an outstanding run, an earnings miss could facilitate such a compression. For this reason, those who have held a long-term position may want to look elsewhere. We think there is room left to run in the shares, yet the majority of explosive appreciation has most likely already occurred.
Although this issue is best suited for growth accounts, a decent dividend yield helps to sweeten the pot. The dividend was raised 13% this year, on top of an even more substantial boost the prior year. Polaris has been increasing its dividend annually for a decade, and we fully expect it to be increased again in 2014, based on its strong balance sheet.
Simultaneously, the company is investing in expanding its factory and distribution capacities domestically and abroad. Acquisitions are likely to expand its international footprint where it seeks a greater presence in attractive and developing markets with the goal of gaining over $2 billion in revenues in the 3- to 5-year timeframe. A general market correction can often provide an attractive entry point for market leaders such as Polaris, who nonetheless may have become a bit overextended in value.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.