Why This Off-Roading Star's Latest Earnings Report Impressed

Source: Polaris Industries

Polaris Industries (NYSE: PII  ) reported 11% growth in earnings per share -- the kind of robust quarter investors have come to expect from the off-road-vehicle stalwart. Let's review four key takeaways from Polaris' most recent earnings report.

1. Strong sales increases
This key measure of product demand rose nicely -- up 19%. Every product line recorded growth, with the largest segment, off-road vehicles, climbing 11%. Parts, garments, and accessories sales increased 20%, and motorcycle sales increased 52%. Snowmobiles grew the slowest at 6%. 

Source: Polaris press release; April 23, 2014

Obviously, off-road vehicles, as the largest business segment, is the key driver of present sales. But, motorcycles and small vehicles, which are small businesses now, are growing very quickly. In motorcycles, Polaris, which sells both the Indian and Victory brands, has advanced to the second position in heavyweight bikes. Here's COO Bennett Morgan on the motorcycle business:  

Indian's momentum remains excellent as new product quality, dealer sign-ups and dealers retailing continue to increase as more Indian showroom constructions are completed. The global power of the Indian brand has been even better than we expected, with international Indian sales to dealers and retail sales well above plan since our launch. We have over 70 international dealers signed, and most of them are currently retailing... Victory retail sales declined mid single digits but essentially outperformed pretty much all heavyweight brands in the first quarter other than Indian and Harley... Recent buyer trends are proving out that our differentiated 2-brand strategy, with Indian competing directly and favorably against Harley and Victory's source of customer volume being primarily from the metric brands.

Small vehicles also represent another potential area for growth. Sales during this quarter were up 248%, including the Axiam acquisition, and sales are expected to increase 25%-30% in fiscal 2014. Here's Morgan on the small vehicle business:

GEM, Goupil and Aixam, grew year-over-year. Aixam expanded its market share lead in Q1 in the European quadricycle industry and realized both strong dealer orders and shipments as their recently launched Model Year '14 vehicle platform continues to be very well received in the marketplace. GEM orders improved by over 20%, and Lean initiatives continued to favorably impact the productivity and profitability of all 3 brands.

2. Improvements in gross and operating margins
Gross margins increased by 10 basis points, and operating margins expanded by 60 basis points. The company continues to get more efficient through lean manufacturing initiatives. For example, Polaris has improved order-to-ship lead times in the motorcycle business from more than 100 days to less than 14; increased motorcycle manufacturing capacity by 50%; and reduced downtime by over 20%. Better yet, Morgan thinks that the company still has plenty of room to improve.

Despite operational improvements, net margins fell by 100 basis points -- not because the company is less profitable, but beause of a tough comparison to the same quarter last year, when Polaris received a special R&D tax credit that the government has since stopped offering. With net income margins of 9.1%, the company remains highly profitable.

3. Solid balance sheet
Polaris has $102 million in cash and debt of $332 million, leaving its balance sheet in good shape. Interest expense during the quarter was only $2.8 million, a pittance compared to the company's $127 million in operating income. Although it doesn't intend to repurchase more shares, Polaris did increase its dividend by 14% -- marking the 19th consecutive year of dividend increases. The stock currently yields a not-huge 1.4%, but that payout should grow over time.

4. Raised guidance
For the full year, the company expects sales growth of 14%-16% and earnings-per-share growth of 17%-19%. That equates to $6.30-$6.45 in earnings per share, which would mean the stock's now trading around 22 times this years estimated earnings. Obviously, that's a premium to the market -- but it seems justified, given the quality of Polaris' business.

Foolish bottom line
Great execution has become business as usual at Polaris. The company has a product that's in-demand, it's consistently working to become more efficient, and the company has top-notch leadership. If you're looking for a great long-term buy, dig into Polaris to see whether it's worth taking the company for a spin in your own portfolio.

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