How Polaris Can Power Up Your Portfolio

Recreational vehicles can be a cyclical and competitive industry, but Polaris (NYSE: PII  ) has a remarkable track record of growth and profitability that puts it ahead of other players in the industry, like Harley-Davidson (NYSE: HOG  ) and Arctic Cat (NASDAQ: ACAT  ) . Even at a premium valuation, Polaris can power up your portfolio for years to come.

A high-quality company
Polaris designs and manufactures off-road vehicles, including ATVs, side-by-side vehicles and snowmobiles. The company also produces on-road vehicles like motorcycles and low-emission vehicles, as well as garments, parts, and accessories.

The company´s management team, led by CEO Scott Wine, has done a superb job at generating growing sales and earnings for investors over the long term, despite the economic uncertainty that has affected the recreational vehicles industry over the last years.

Recreational vehicles are discretionary big-ticket items, and they can be very sensitive to fluctuating economic conditions. Polaris is no exception to the rule; the company suffered a revenue decrease of more than 19.6% in 2009 because of the lingering effects of the Great Recession.

However, when compared against competitors like Harley-Davidson and Arctic Cat, Polaris has proven an unmatched ability to grow sales and earnings through the ups and downs of the business cycle.

This superior financial performance did not come out of thin air: a strong brand presence and a focus on quality and innovation have allowed the company to gain market share in the power-sports market over the last years.

Source: Polaris Investor Presentation

Polaris benefits from a wide distribution network of nearly 1,650 dealers in North America, and 1,100 international dealers. In addition to that, the company has made a series of recent acquisitions like Indian Motorcycle and Axiam Mega – a French company which manufactures on-road quadricycles and light-duty commercial vehicles in Europe – to broaden its market presence and capitalize more growth opportunities.

Polaris recently broke ground for a new manufacturing facility in Poland, and the company is building a new plant in Jaipur, India via a joint venture with Eicher. If Polaris manages to replicate in international markets at least part of the big success it has obtained in North America, global expansion could be a material growth driver for the company in the middle and long term.

Firing on all cylinders
There is no slowdown at sight for this power-vehicles manufacturer.  Polaris reported a 25% year-over-year sales increase for the third quarter, to $1.102 billion. This was the first time in the company´s history that Polaris produced more tan $1 billion in quarterly revenues. Net income from continuing operations increased 24% year over year to $116.0 million, or $1.64 per share, versus Wall Street analysts' average estimate of $1.61 per share.

Revenues were strong across the board, with the notable exception of motorcycles. Sales of off-road vehicles increased by 23% during the quarter; snowmobile sales grew by 25%; small vehicles increased by 188%; and parts, garments, and accessories grew by 37% during the quarter.

Motorcycle sales decreased by 6%, though, which management attributed to dealer inventory adjustments and other transitory factors. CEO Scott Wine was quite optimistic about prospects for Indian motorcycles in the coming quarters:

"Our Indian website set Polaris traffic records each of the first 3 days following the launch. Facebook fans now exceed 400,000, and more than 13,000 people have taken demo rides. Indian is kicking and screaming to get going." 

Management raised its full-year 2013 earnings guidance for earnings from continuing operations to between $5.3 and $5.37 per share, representing and increase of 20% to 22% over 2012. The company expects revenue to increase between 15% and 16% in 2013 versus 2012.

Checking out the competition
Polaris isn't the only company thriving in this sector. Harley-Davidson, the leading motorcycle manufacturer, delivered a 7.5% increase in revenue and 23.7% growth in earnings per share for the third quarter. Worldwide retail sales of new Harley-Davidson motorcycles increased by 15.5% during the quarter, including a big 20.1% increase in the U.S.

Harley may not have the same kind of diversification and global reach as Polaris, but this iconic brand is as strong as ever when it comes to defending its leadership position in motorcycles.

Arctic Cat, on the other hand, delivered falling earnings at $1.70 per share during the last quarter, versus $1.80 in the same quarter of the previous year. Revenue increased by a moderate 4%, while the company delivered double-digit growth in snowmobiles and side-by-sides, ATVs sales in Europe and North America fell short of management´s expectations during the quarter. 

All in all, it looks like Polaris continued outgrowing Arctic Cat by a wide margin in the most recent quarter.

Polaris trades at a forward P/E ratio above 20, versus 17 for Harley-Davidson and 14 times forward earnings for Arctic Cat. This valuation premium will demand considerable growth rates from Polaris. But considering its track record of success, there is no reason to believe it can´t justify its valuation over time.

Bottom line
Polaris has proven its ability to deliver superb financial performance over time. Considering growth opportunities in international markets and the possibilities provided by recent acquisitions, the company looks well-positioned to continue running at full speed.

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