3 Risks Affecting Polaris Industries Inc.

Polaris and its competitors have these risk factors to deal with in the powersport and motor vehicle markets.

Mar 3, 2014 at 8:31AM

Polaris Industries (NYSE:PII) had a successful 2013; its sales increased 18% and its research and development pipeline delivered several new products. But operating in the powersport and motor vehicle markets has specific risks that affect the company and its competitors. Polaris, Arctic Cat (NASDAQ:ACAT), and Honda (NYSE:HMC) have identified the following risks to their potential earnings.

Those pesky regulations
The companies must comply with safety and environmental regulations put forth by the government.

Environmental regulations can apply to vehicle emission levels, fuel economy, noise level, and factory pollutants. When these regulations become more restrictive, as they often are due to an increasing concern with climate change, the cost for the company to comply can negatively affect a company's bottom line by increasing operations.

Safety laws restrict several of Polaris' products to designated areas. Any new restrictions on product use could potentially decrease its popularity and harm sales. An example of this can be found in China, where motorcycles have been banned from specific roads in almost 200 cities, including Beijing. It's also mandatory to destroy a motorcycle 11 years after its registration. This makes owning a high-end motorcycle expensive and inconvenient in China and could hinder Polaris as it grows its Indian brand overseas.

Blame the weather
If you sell snowmobiles, like Polaris and Arctic Cat do, then you depend on snowfall to make your products relevant. If there is a shortage of snowfall then sales of snowmobiles and their related accessories could suffer. Conversely, if there is an unusually high amount of snowfall during a particular season, snowmobile sales could increase.

Polaris Snowmobile

Source: Polaris Industries

Because the weather is unpredictable, Polaris and Arctic Cat can never be completely sure how it will affect sales. Also, the potential of global climate change has the ability to affect weather conditions more drastically than originally anticipated. It's good to have flexible production capabilities that can react to changes in demand. Polaris is working toward this with its continued investment in lean manufacturing.

Foreign currency
Because Polaris, Honda, and Arctic Cat operate on a global scale, changes in foreign currency rates could have a negative impact and net earnings. The companies purchase and sell products and components in foreign currencies, and changes in these currencies could affect global pricing and sales. During its most recent quarter, Arctic Cat saw a drop in its gross margin partially driven by Canadian currency fluctuation. The currency shift cost the company $900,000 for the quarter and roughly $2.6 million year to date.

Companies attempt to minimize the risk of currency fluctuation by entering into foreign exchange hedging contracts and using other hedging instruments like currency swaps and options. While risk cannot be completely eliminated, these contracts mitigate the risk of conducting business overseas. 

Be prepared
Government regulation, the weather, and foreign currency exchange cannot be directly controlled by Polaris, Arctic Cat, or Honda. This means that the companies must be prepared to handle negative changes in any of the categories. All companies operate around conditions they cannot control, but by identifying risks they will hopefully be prepared for the future. Being aware of the risk factors that companies face is also an important part of being an informed investor.

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Ben Popkin has no position in any stocks mentioned. The Motley Fool recommends Polaris Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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