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A Company Capable of Outperforming Harley-Davidson

When you invest in a company that is seeing increased demand while also improving the bottom line, your odds of success greatly increase. When a dividend is added to the scenario and the balance sheet is clean, strongly consider an investment in that company.  

In the current economic environment, you probably wouldn't expect a recreational vehicle company to be performing well. However, the company featured in this article has defied the odds and rewarded its investors handsomely.  

High expectations
The following company recently saw its third-quarter revenue jump 25% year over year, seeing strength both domestically and internationally. Part of the international strength has been thanks to acquisitions. However, as long as the top and bottom lines grow in tandem, it doesn't matter if it's organic growth or inorganic growth. This company's gross margin also improved 90 basis points to 30.40% thanks to higher selling prices and lower costs. Furthermore, it recently raised guidance.

This company is none other than Polaris (NYSE: PII  ) . The name wasn't brought up until now because it's not often talked about on the street. If the name had been revealed first, then you might have disregarded it.  

Polaris designs, manufactures, and sells off-road vehicles, snowmobiles, motorcycles, and more. Its off-road vehicles are by far the biggest part of the operation. Therefore, it's good to see that off-road vehicle sales jumped 23% year over year, thanks to strong demand for ATVs. However, that already happened. Investors want to know about the future. The future looks bright. 

Polaris had $3.2 billion in sales in fiscal-year 2012. That's a big number for a company focused on off-road vehicles. However, Polaris recently relaunched its Indian motorcycles (Chief Classic, Chief Vintage, and Chieftain), it has its Victory motorcycles, and it's seeing high demand for almost everything it sells.

Based on these trends, Polaris now expects sales to total $8.0 billion by 2020. If this prediction comes to fruition, Polaris would more than double its sales in seven years. Considering that the company came into existence in 1987, that would be quite a feat. Of course, there are no guarantees. If the real estate and stock markets don't hold, then all bets are likely off. Polaris can't worry about that. It can only grow its business to the best of its ability, and it's very good at doing so.

For fiscal year 2013, Polaris expects diluted earnings per share to grow at a 20%-22% clip, and for sales to increase 15%-16%.

Polaris vs. peers
When you think of recreational vehicles, you likely think of Harley-Davidson (NYSE: HOG  ) . While Polaris' motorcycles have the potential to steal some share from Harley-Davidson, they're not likely to make a significant impact. Harley-Davidson is doing well itself with its third-quarter revenue increasing 7.5% and its diluted EPS jumping 23.7%. Retail motorcycle sales improved 15.5% globally as well as 20.1% domestically.

For the year, Harley-Davidson expects to ship 259,000-264,000 motorcycles to dealers and distributors. That being the case, it might have crossed your mind as to why Polaris would present a better investment opportunity than Harley-Davidson. We'll get to that soon. Let's first take a look at Arctic Cat (NASDAQ: ACAT  ) , a recreational vehicle company that designs, manufactures, and sells snowmobiles, ATVs, and UTVs.

Arctic Cat has also been a strong performer lately. It's looking to spend more on research and development (16% increase over last year) in order to help drive sales. At the same time, Arctic Cat is moving toward in-house manufacturing to help reduce costs. It would be impressive if Arctic Cat could grow its top and bottom lines at the same time. It has already done so. Actually, all three companies mentioned here have accomplished this goal: 

Top line

HOG Revenue TTM Chart

HOG Revenue TTM data by YCharts

Bottom line

HOG EPS Diluted TTM Chart

HOG EPS Diluted TTM data by YCharts

While Arctic Cat is a solid company, it doesn't have the marketing power of its peers. While the company sports an ideal debt-to-equity ratio of zero, it only yields 0.70%. Polaris yields 1.20% while sporting a debt-to-equity ratio of 0.13 -- also impressive. Harley-Davidson yields 1.30%, but its debt-to-equity ratio of 1.96 isn't nearly as comforting.

If you're thinking that Polaris doesn't stand a chance at outperforming Harley-Davidson going forward, you might want to compare their stock performances over the past decade: 

HOG Chart

HOG data by YCharts

The bottom line
Harley-Davidson is one of the strongest brands around, and it's highly likely to remain a long-term winner. However, it makes a lot of sense to go with a recreational company seeing similar growth, a similar yield, and a much cleaner balance sheet -- Polaris. 

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Read/Post Comments (7) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 26, 2013, at 10:56 AM, 392171033720 wrote:

    Plus, Harley is in a bit of a pickle at the moment:

  • Report this Comment On October 26, 2013, at 12:03 PM, Safetyman wrote:

    How do you say that the Polaris brand only came into existence in 1987? They had Polaris snowmobiles when I was young and still snowmobiling, back like 30 - 35 years ago. It was well before 1987, I know that(?)

  • Report this Comment On October 26, 2013, at 2:15 PM, clutch1958 wrote:

    I rode a Polaris snowmobile in 1974.

  • Report this Comment On October 26, 2013, at 4:31 PM, stanich wrote:

    Within a decade most Harley riders will be in sundry cemeteries...

  • Report this Comment On October 26, 2013, at 5:23 PM, PaladinLV wrote:

    This isn't about Polaris recreational vehicles!!!

    It's all about the new, improved, and resurgence of Indian Motorcycles by Polaris.

    If you talked about Indian, then maybe someone would understand WTF your trying to say.

  • Report this Comment On October 28, 2013, at 11:39 AM, Oldbiker wrote:

    Indians have been around a long time and I hope PII does them proud. But if PII really wants to crack the HOG nut, they will have to come up with more sportier models and promote more than just the name brand - like riding clubs, clothing lines, accessories, racing teams, rallies, show rooms dedicated to the product, etc. PII needs to develop critical promotional mass for Indian - price alone won't do it. What scares many current bikers from Indians, is the brand has been in and out of production too many times. We don't want to give our Hogs up and switch to a brand that has no viable shelf life, or has a legacy of 'here today, gone tomorrow'. Converting existing Hog owners will be tough. Recruiting new bikers to the Indian models will most likely be the niche for a while. But hey - bring on the Indians. I own PII but I just don't see how the Indian will have that much impact on the bottom line anytime soon. I own a Hog - and will until I can no longer ride. It's been a damn good brand.

  • Report this Comment On November 07, 2013, at 7:13 AM, gWood777 wrote:

    Harley-Davidson hasn't changed its marketing spiel in over a decade, but it's still selling roughly the same bikes to roughly the same people. Anyway, looking at their latest 10-Q it appears that they are under-capitalized compared to the other motorcycle and rec vehicle manufacturers and will be really squeezed by the inevitable rise in rates on their short and medium-term debt. And there is the small item at the end of the 10-Q about their increasing reliance on selling to those with poor credit ratings.

    quote: "The Company believes that HDFS' retail credit losses may increase over time due to changing consumer credit behavior and HDFS' efforts to increase prudently structured loan approvals in the sub-prime lending environment."

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Related Tickers

9/23/2016 4:00 PM
ACAT $14.96 Up +0.23 +1.56%
Arctic Cat CAPS Rating: **
HOG $52.52 Up +0.57 +1.10%
Harley-Davidson CAPS Rating: ***
PII $74.89 Up +1.08 +1.46%
Polaris Industries CAPS Rating: *****