Polaris: ATVs, Snowmobiles, and Motorcycles

09/25/2015 8:00 am EST

Focus: STOCKS

Ingrid Hendershot

Founder and President, Hendershot Investments, Inc.

Our latest featured value investment markets innovative, high quality on and off-road vehicles, notes Ingrid Hendershot, value oriented money manager and editor of Hendershot Investments.

Polaris (PII) made its first snowmobile in 1956, constructed from a grain elevator belt with pieces of a Chevy bumper for skis.

Innovation has since powered this brand-building machine. Polaris has expanded into all-terrain vehicles, Victory and Indian motorcycles, accessories, and apparel.

In 2014, Polaris added more than thirty new vehicles to its armada, including 20 new off-road vehicles and the revolutionary Slingshot, a 3-wheeled motorcycle.

In a first for the off-road industry, Polaris recently introduced a Ranger utility vehicle powered by a lithium-ion battery. Later this year, Polaris will begin selling its first electric motorcycle, the Victory Empulse TT.

During the past five years, Polaris has generated strong double-digit growth with revenues compounding at a 23% annual rate and earnings speeding even higher at a 33% annual rate.

Strong brands and a relentless focus on controlling costs and driving manufacturing efficiencies have powered very profitable operations.

Over the past five years, Polaris has produced a powerful 56% average return on shareholders’ equity.

The company generated $324 million in free cash flow during 2014 and returned $209 million to shareholders through cash dividends and stock buybacks.

Polaris reported second quarter sales rose 11% to $1.1 billion with earnings increasing a sluggish 4% to $101 million with EPS up 5% to $1.49.

Gross margins downshifted due to difficulties with a new motorcycle paint system in Spirit Lake, Iowa.

Despite an expected $20 million cost to rectify the problem, management expects full year 2015 sales and earnings to throttle ahead between 10%-12% with full year EPS expected in the $7.32-$7.42 range.

Hitting a speed bump put the brakes on the price of Polaris’ stock, giving long-term investors the opportunity to rev up long-term portfolio returns.

Polaris is a high-quality innovative global manufacturer with strong brands, powerful returns on shareholders’ equity, and double-digit growth. Buy.

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