Polaris (PII) has come a long way in 50 years. In December 1955, in an effort to make hunting more accessible, three employees of farm equipment manufacturer Polaris developed the first snowmobile and rolled into the snow in January 1956. It had a grain elevator conveyor belt for a track, pieces of a Chevy bumper for skis, and drove through the snow like no other vehicle ever had. In the 1970s Polaris snowmobile racing teams dominated the sport and then the company then introduced its first ATV in 1984.
Polaris branched out into motorcycles in the late 1990s developing its Victory line to compete with Harley Davidson. The first Victory bike was built on the Fourth of July 1998. In 2011 the company acquired the Indian brand, which was an immediate hit for the stock, as PII shot up from $46 to $55 the day after the acquisition was announced.
Today 61% of company sales are off-road vehicles (ORV), 14% are motorcycles, and 2% are snowmobiles. Last qtr ORV sales increased just 2% while motorcycle sales grew 57%. The real question about Polaris today is competition in the side-by-side ORV market coming from Honda and Yamaha, which are introducing new SxS models. SxS accounts for around half of PII’s sales and profits.
One Year Chart
Polaris stock has a 18% estimated long-term growth rate, and the company pays a yield of around 1.5%. So perhaps 20% growth for 18x earnings. Not bad. PII was $28 ten years ago and has paid $10 in dividends during the decade while the stock has grown an average of 17% a year.
Last qtr PII had a couple of obstacles. First, Motorcycle demand outpaces the company’s ability to produce, and the company had system problems painting bikes, and thus outsourced the task and paid a premium to do so. This cut profit growth from 11% to 5%. But this should have been treated as a one-time deal by analysts and growth should really read 11%. We should expected one more qtr of paint issues before its resolved. The second issue was foreign exchange.
Fair Value
Without foreign exchange, Polaris would likely make $8 in profits this year, which would be 20% profit growth. I’m keeping a Fair Value of 18 for now due to the competition coming in the SxS market.
As I write this, the stock market is in a serious correction and PII’s down to $124, making the current P/E 17.
Sharek’s Take
Polaris has good long-term appeal and could give investors total returns of 20% a year. Profits would be growing now 20% if it weren’t for F/X, and for 17-18x earnings the stock is very reasonable. The main issue with PII now isn’t F/X or paying more to get bikes painted, but competition in the side-by-side off-road vehicle market.
With the stock down and not timely, I’ll look to buy shares of PII for growth investors if the stock continues to decline. Below $115 would be 15x earnings, which I feel would be a bargain.
View the Earnings Table here. View the Profit History here.View the Ten Year Chart here.
