Image source: Polaris Industries.
After a sharp rise in stock prices after the recession, both Polaris Industries Inc. (PII 0.48%) and Harley-Davidson (HOG -0.23%) have had a rough go of it during the past year. Revenue and net income growth (shown below), which drove both stocks during the past five years, have flattened out.
PII Revenue (TTM) data by YCharts.
With an uncertain economic future ahead, investors have scaled back their own expectations. At today's prices, which one is the better buy?
Harley-Davidson wins on brand loyalty
When looking at the difference between these two companies, I see that Harley-Davidson is a dominant player in a fairly small portion of the recreational-vehicle market. In the first quarter of 2016, it had a 50.9% market share in U.S. 601-plus CC retail motorcycle sales. In Europe, it had a 10.3% market share, up from 9.8% a year earlier.
This relatively narrow market focus is both Harley-Davidson's strength and its weakness, depending on how you look at it. The company can command high prices, and generated an impressive 21.1% operating margin in the first quarter. But it also has fewer opportunities to grow, and it has to carefully manage both its brand and supply of its product to make sure it doesn't oversupply the market, thereby diluting the aura of Harley-Davidson.
Polaris wins on breadth of market
Depending on where you live, you may know Polaris for a number of different products, from ATVs to motorcycles to snowmobiles. But its bread and butter is off-road vehicles, as you can see below.
Image source: Polaris investor presentation.
That focus on off-road vehicles has helped the business tremendously, because the segment grew at a compound rate of 15% from 2010 to 2015. But these are vehicles meant for riding in the country, through work sites, and in the mountains, not in metro America. That makes the segment very susceptible to fluctuations in demand from blue-collar workers in the middle of the country.
Image source: Polaris.
When commodity prices dropped in everything from oil and gas to agriculture, good-paying jobs went with them. And demand for Polaris' off-road vehicles naturally dropped, as well. Even a 21% increase in motorcycle sales, driven by the increasing popularity of the Indian brand, wasn't enough to offset the lost off-road sales.
But that highlights Polaris' strength, as well. When one business is down, another is up. It's just that the biggest portion of its business is struggling at the moment, which doesn't allow something like motorcycles to offset the weakness.
The hope for Polaris is that the worst of the market is behind the off-road business, and a recent improvement in commodity prices will eventually drive demand growth. But for now, having indirect exposure to commodities has been a detriment to operations.
Upside is what separates these two stocks
There's no question that Harley-Davidson is the safer of these two stocks, with a trailing P/E ratio of 12.0, forward P/E of 10.4, and dividend yield of 3.1%. But I think Polaris has more upside given the 50% compound annual growth in motorcycles during the past five years, driven by the Indian brand, and the upside potential as commodity prices rise.
We're reaching a bottom for the business, and with a trailing P/E ratio of 13.5, a forward P/E of 11.7, and a dividend yield of 2.6%, the upside is worth the risk in Polaris Industries.
