Polaris Rides to Victory

If you haven't seen a Polaris (NYSE: PII) motorcycle, check out Marvel's (NYSE: MVL) Fantastic Four movie, in which Johnny Storm (a.k.a. the Human Torch) cruises around on a Victory Vegas. These Victory-brand cycles have been picking up steam since they entered the market in 1998. In yesterday's release, Polaris reported that second-quarter motorcycle sales jumped 24% sequentially.

But don't hop on this hog just yet. Motorcycles composed only 4% of total sales in fiscal 2004. While management cites cycles as one of the company's "growth engines," the verdict is still out on the brand's staying power compared with tough competitors such as Harley-Davidson (NYSE: HDI).

The company's core business, ATVs and snowmobiles, is much more established. Polaris was selling snowmobiles (then known as "gas-powered sleds") back in 1954. It entered the ATV market in 1985, 10 years before Arctic Cat (Nasdaq: ACAT), but long after Honda (NYSE: HMC) had introduced the machine.

For the second quarter, ATV sales were up 13% and snowmobile sales saw a modest 6% increase sequentially. By the same comparison, total revenues rose 12.1%, while net income from continuing operations grew by only 9.9%.

Earnings growth couldn't keep pace with revenues because the company's gross margin fell almost 160 basis points. The margin squeeze resulted from higher warranty expenses and increasing fuel and raw material costs.

Overall growth is still steady, though, and the company has cash to spare. Even better, management avoids chasing acquisitions with shareholders' money. During the second quarter, the company spent $71 million to repurchase shares, even as it paid a 2% dividend.

With plentiful cash coming back to shareholders and a long-term history of earnings growth, Polaris deserves a spot on your watch list. The stock has beaten the S&P 500 since going public in 1994. If management focuses on the core business, it could maintain this lead for an investment lifetime. There are always risks, however; the investor who waits for a margin of safety will probably have a much smoother ride.

More full-throttle Foolishness:

• Harley-Davidson had a decent quarter -- or did it?
• Last quarter, Polaris wheeled out growth.
• Even in summer, Arctic Cat stays cool.

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Fool contributor Matt Thurmond holds no financial position in any company mentioned in this article.