Polaris Bets Indian Motorcycles Will Rev up Profit

 Polaris Industries  (NYSE: PII  ) may be better known by its snowmobiles and off- road vehicles, but its big bet on buying Indian Motorcycles in 2011 shows the company is positioning itself for a much bigger push onto highways.

Moving from the back country to the big slab
Make no mistake -- the company's off-road vehicles remain the driving force behind Polaris' sales and profit growth. In North America, the number of ORV units sold climbed in the low double digits last quarter, led by side-by-sides, which are increasingly popular on farms and ranches. Sales of ORVs have doubled since the recession's 2009 low.

The strength in Polaris' Ranger side-by-side model helped Polaris grow its share of the U.S. all-terrain vehicle market to 21.4%, well ahead of No. 2-ranked Honda at 8.2%.

Source: Polaris Investor Presentation - August 2013.  

But the company isn't content relying on ORVs for future growth. Instead, it's making a big bet that the venerable Indian brand can reignite Polaris' position in motorcycles.

Polaris' Indian brand will join Polaris' home-grown Victory brand in an attempt to wrestle away some of Harley-Davidson's (NYSE: HOG  ) 55% heavy weight motorcycle market share.  Polaris is already the No. 2 player in the segment thanks to Victory, but the Victory brand has stagnated at just 5% market share. As a result, motorcycles only account for about 6% of Polaris' total revenue.  

The new Indian lineup includes the Indian Chief Classic starting at $18,999, the Indian Chief Vintage at $20,999, and the Indian Chieftain at $22,999. Polaris hopes the introduction of these three bikes will create enough momentum to grow its market share to 10% by the end of 2015, and produce $750 million in annual sales over the next five-to-seven years. 

It's an aggressive goal. Sales of Polaris-made motorcycles fell 6% to $49.8 million last quarter.   Some of the drop can be blamed on Polaris' shift to just-in-time order fulfillment tied to dealer sales. And, some sales may have been lost to riders holding off to see the new Indian lineup.

Despite the headwinds, Polaris remains bullish, guiding for full-year motorcycle sales growth of 15%-20%.

Source: Polaris Investor Presentation - August 2013.  

If a recent recall of pre-Polaris made Indian motorcycles is an easily resolved blip, and the company makes good on its forecast, a lot of thanks will likely be tied to the company's extensive 1,500-dealer network, which includes 400 motorcycle dealers. Polaris hopes its Indian dealer network will reach 125-150 by year end.  

The company has the depth to make the bet
Taking on Harley Davidson is a big bet for the Minneapolis-based Polaris. But it has plenty of experience building and financing riding machines. Also, its large network provides plenty of distribution and opportunities to sell margin-friendly gear and apparel, a business which accounted for $133 million in sales last quarter. 

Polaris also has the balance sheet to support the $100 million investment in designing and launching the new Indian motorcycles. 

Last quarter, Polaris sales were $845 million, up 12% from a year ago.  Those sales produced earnings per share of $1.13, up from $0.98 last year, as operating margins improved. The sales growth, driven by a combination of higher prices and unit sales, kicked off 32% more cash from operations than last year, or $103 million in the first six months of the year.

That operating cash is allowing the company to grow its dealer network overseas with the goal of growing international sales to one-third of total revenue.

The final take
Indian brings new life to Polaris' motorcycle operations, giving it more manufacturing margin leverage and an opportunity to win additional sales not just from the motorcycles, but also from financing, gear, and apparel.

If Indian is as successful as Polaris projects, the company has a good chance of meeting its goal to grow to $8 billion in annual sales in 2020 from $3.6 billion this year.  That would be good for 12% compounded annual growth.

In the short term, strength this year allowed Polaris to boost its forecast to $5.20-$5.30 earnings per share in 2013, up 18%-20% from a year ago, on sales growth of 13%-15%.

Those numbers suggest Fools may want to keep an eye on Indian's sales over the coming months.  If all goes to plan, Indian may give you another reason to invest in the company.


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