Fresh off of its surprise Q4 2006 "earnings beat" -- its first such exceeding of expectations in two years -- Polaris (NYSE:PII) is ready to launch itself into fiscal 2007. Q1's news should be out in just a few short hours (i.e. Thursday morning).

What analysts say:

  • Buy, sell, or waffle? Fifteen analysts follow Polaris. Three of them think the stock's a buy, 10 more a hold, and the last two a sell.
  • Revenues. On average, they're looking for a 6.6% decline in sales to $311.6 million.
  • Earnings. Meanwhile, profits are predicted to rocket 23% to $0.32 per share.

What management says:
In February, management made a couple of interesting announcements in the course of a single press release. First, it "raised guidance" for fiscal 2007 by about 4%, promising to deliver $2.91 to $3.03 in profits per share. Investors interested in "earnings beats" such as the one Polaris scored last quarter might want to buckle in for another one tomorrow. Thanks to the raised guidance, Polaris is looking for anywhere from $0.32 to $0.34 per share tomorrow; if it hits its top estimate, it will easily surpass the Street's expectations. That said, Polaris held its sales estimates steady, and it's still expecting about a 7% decline tomorrow, and about a 2% increase in sales for the year.

So what gives? If sales are no different than previously expected, why are earnings higher?

In short, Polaris's sale of KTM shares (previously discussed here) will add about $0.09 per share, pre-tax, to its reported profits this quarter, and another $0.02 in Q2. Going forward, the company will use the proceeds of this sale to pay down debt -- meaning it will spend less cash on interest in the future. So this sale should benefit shareholders in both the short and long term.

What management does:
Polaris got its rolling gross margins moving back upward again (finally) last quarter. Operating and net margins, on the other hand, continue to head south.

Margin

9/05

12/05

3/06

6/06

9/06

12/06

Gross

24.5%

23.6%

23.5%

23.7%

23.3%

23.9%

Operating

11.5%

10.9%

11%

10.9%

10.7%

10.1%

Net

7.4%

7.2%

7.3%

7%

6.9%

6.3%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Polaris tends to compile detailed descriptions of its business, then publish them for all the world (and especially its investors) to see. Reviewing the latest such presentation on the SEC's site gives us a few clues on what to expect in the future. Highlighting points more or less at random, here's what jumps out at me:

  • 2004 and 2005 were years of extraordinary capital investment. Last year, capex dropped back toward its "normal" range of $50 million-$60 million per year, and 2007 is expected to look pretty similar. Expect strong free cash flow going forward.

  • Management predicts that 2007 will bring "decent results but not spectacular." On the one hand, I'm sure investors would love to hear "spectacular." On the other, I'd advise them to be happy just to see the modest honesty here.

  • A key theme in each of Polaris's business segments is market-share growth: in ATVs (currently two-thirds of sales), in snowmobiles, where it competes fiercely with Arctic Cat (NASDAQ:ACAT), and in motorcycles, where the collapse of the KTM deal will make for slower going. Put it all together, especially in light of the weak snows of winter 2006/2007, and ATVs seem like the most promising area for growth this year.

For further recreational (vehicle) reading on Polaris and its peers such as Arctic Cat, Ducati, and Harley-Davidson, read:

Fool contributor Rich Smith does not own shares of any company named above. The Fool has a fearless disclosure policy.