Polaris (PII) designs and manufactures snowmobiles, all-terrain vehicles (ATVs) and motorcycles; the $7.7 billion market cap company operates in more than 100 countries and should generate about $8.5 billion in sales this year, notes Ben Reynolds, editor of Sure Dividend.

Polaris enjoys a competitive advantage through its brand names, low-cost production and long history in its various industries. Its 30+ brands include Polaris, Ranger, RZR,Sportsman, Indian Motorcycle, Slingshot, and Transamerican Auto Parts.

Polaris reported first-quarter earnings in late April and results were well ahead of expectations for both the top and bottom lines. Off-Road Vehicles & Snowmobiles led the way with a 50% gain in the top line, which is critical given this is Polaris’ largest source of revenue.

We’ve updated our estimate for this year accordingly, and now expect $9.10 in earnings-per share. Polaris also announced up to $1 billion in share repurchases, equal to ~12% of the current float.

That being said, the company does face a number of notable challenges: formidable competitors such as Harley-Davidson (HOG) and Honda Motor (HMC), sales of a big-ticket sales item that depends on the economy, a product line that is dependent on weather (snowmobiles), and company-specific issues to deal with such as recalls over the last few years.

From 2008 through 2018, Polaris was able to grow earnings-per-share by an average compound rate of 14% per year. However, growth fell off dramatically in 2016 as the company dealt with recalls and restoring confidence in the brand. In the last couple of years Polaris has managed to improve its brand image, and earnings have once again improved, with 2020 being a standout amidst the pandemic.

Over the long-term, Polaris can formulate growth via the ongoing replacement need for ATVs and snowmobiles, growth in international markets, and acquisitions. We forecast 5% annual growth. We expect Polaris to generate earnings-per-share of $9.10 in 2021.

Based on this, the stock is currently trading at a price-to-earnings ratio (P/E) of 13.7. Our fair value estimate is a P/E of 16.0, which means expansion of the P/E multiple could increase returns by 3.1% per year. When combined with the 5% expected growth rate and 2% yield, total return potential comes to an attractive 10.0% per year.

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