How Indian and Victory Could Outrace Harley-Davidson

Once seen purely as an off-road vehicle company, Polaris Industries (NYSE: PII  ) is now taking on the legendary Harley-Davidson (NYSE: HOG  ) in the motorcycle category with a pair of venerable brands. Along the way, Polaris continues to take market share in the off-road segment, dominating competitors like Arctic Cat (NASDAQ: ACAT  ) .

Polaris Coming on Strong
On Oct. 22, Polaris reported strong quarterly earnings and revenue that beat analysts' estimates and came in above the prior year's numbers. Earnings per share increased to $1.64, beating estimates by $0.03 per share. Quarterly revenue of $1.1 billion easily beat estimates by $50 million. Total revenue was up 25% from the prior year. For the first time in company history, Polaris hit $1 billion in quarterly revenue, a significant milestone for a company with a market capitalization of less than $4 billion.

Polaris's recent third-quarter earnings showcase strong performances for the quarter and year to date across all segments. The company had sales of $702 million for off-road vehicles in the third quarter, and $1.9 billion for the fiscal year. The segment has had increases of 23% and 12% for the third quarter and year-to- date, respectively.

In the third quarter, snowmobile sales increased 25%, small vehicle sales increased 188%, and the company's parts and accessories business was up 37%.

Arctic Cat Declining
On the flip side of Polaris is competitor Arctic Cat, which has seen sales riseat much smaller rates as it loses share to its rival.

In the most recent second quarter, Arctic Cat posted earnings per share of $1.70, which missed analysts' targets by $0.26. Despite this huge miss, shares are still trading toward the high end of the stock's 52-week range.

In the quarter, sales of ATVs were down, but sales of snowmobiles and side-by-sides were up enough to post a small increase in quarterly net sales to $238.5 million. Arctic Cat also saw lower sales in its business segments of parts and accessories. Arctic Cat saw quarterly sales of $72.7 million for ATVs and side-by-sides in the second quarter. This is very small compared to Arctic Cat.

Polaris has higher sales and more profits thanks to its gross profit margin in the 30% range. Arctic Cat, on the other hand, saw a gross profit of 25.9% in the second quarter. Arctic Cat expects double-digit growth this year, but analysts on Yahoo! Finance see sales jumping 8.5% in fiscal 2015. I think those numbers may be high if Polaris continues to grab share from Arctic Cat.

Taking on a Legend
The one business segment that wasn't up in the third quarter was Polaris' motorcycle unit. Total revenue of $49.4 million represented a 6% decline. Keep in mind that Polaris recently launched new brands of motorcycles, and that it's actually set to grow that business segment substantially. Polaris owns the Victory and Indian brands, and it'll have a strong lineup of launches heading into 2014.

I'm most optimistic about Polaris's newer entries into the motorcycle category. From 1901 to 1953, various U.S. companies made motorcycles under the Indian brand. But Indian ended up bankrupt, and it looked like it would never come back until Polaris reintroduced it in 2013. Now, the company is set to launch several new models for the 2014 year.

Polaris' jump into the motorcycle category should have investors in Harley-Davidson on edge. Motorcycle enthusiasts are excited to see the reintroduction of the Indian brand. However, Harley itself is an established lifestyle brand with a cult-like following, which means Polaris could have a hard time taking share away from the king of the market. 

Harley Davidson sold 70,517 motorcycles in the third quarter. Over the first nine months of the fiscal year, Harley Davidson has sold 213,853 motorcycles. The company regularly sells 200,000 motorcycles a year. 

For the first nine months, motorcycle unit sales are up 6.6%, while motorcycle revenue is up 9.8%. Harley Davidson also enjoys a strong gross margin north of 35%. This should be a great way to see the demand for motorcycles in the current market and also the possibility for Polaris' margins to increase with higher-priced motorcycles.

Harley Davidson also enjoys sales as a strong brand that is licensed and used on apparel. If Indian and Victory can become strong brands for Polaris in a similar fashion, Polaris could see strong apparel sales. This apparel category will take some time for Polaris, but could become a great revenue driver down the road.

Farther Down the Road
Polaris recently raised its full-year financial guidance. For the fiscal year, Polaris now expects earnings per share to come in between $5.30 and $5.37. Analysts on Yahoo! Finance see Polaris posting earnings per share of $5.38. That number is expected to rise to $6.44 for fiscal 2014. Total revenue is expected to grow 16.9% and 14.3%, respectively, over the next two years.

Although shares of Polaris are nearing 52-week highs, the company's growth story isn't done. Polaris is seeing double-digit growth, and with two legendary brands in its stable, it has the possibility of competing with the biggest player in motorcycles. Keep an eye on Polaris's calls to see how well Indian and Victory can steal away Harley-Davidson's success.

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