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The fall of 2016 hasn't started off as smoothly as Polaris Industries Inc. (PII 2.25%) hoped it would. The company recently announced that a recall of some of the popular RZR off-road vehicles has been far more costly than expected and a permanent fix has been elusive, pushing sales of RZR Turbo and other off-road vehicles into next year. The big shocker was earlier this week, when management lowered 2016 full-year earnings guidance by $2.50 to $2.70 per share down to a range of $3.30 to $3.80 per share.
While off-road performance hasn't been what investors may have hoped, there is a Polaris business that's performing better than expected this year. And it's the payoff from an investment made years ago.
Motorcycles coming back in style at Polaris
In April 2011, Polaris announced the acquisition of the Indian Motorcycle brand, a legend in the world of motorcycles but a forgotten brand at the time. The idea was to make Indian Motorcycles "cool" again and spice up Polaris' Victory brand, which wasn't exactly setting the world on fire. Over the past five years, Polaris has done just that, building a brand consumers are attracted to. Polaris doesn't release detailed sales numbers for Indian, but in the forthcoming discussion of financials, I'll outline how the brand could be helping the business.
On top of Indian Motorcycles, Polaris introduced Slingshot in 2014, a three-wheeled "motorcycle" that has been a hit with consumers. Building those two brands has made motorcycles the company's best business and has brought financial results along with it.
Revving up motorcycle sales
In the second quarter of 2016, motorcycle segment sales jumped 23% to $231.3 million and gross profit was up 63% to $39.8 million. Management said that retail demand for Polaris motorcycles was up by a mid-teens percentage during the quarter, even as industry demand for 900 cc-plus motorcycles fell by mid-single digits.
The growth numbers are big, but there's still a lot of potential for motorcycles at Polaris. Industry leader Harley-Davidson (HOG +0.62%) reported $1.86 billion in sales during the second quarter, primarily from motorcycles that compete directly with Polaris'. It's not likely Polaris will be near Harley-Davidson's size anytime soon, but this puts a little scale to the opportunity.
Will strong motorcycle performance continue?
Early 2016 may have been good for motorcycles, but that success was overshadowed by problems in the off-road segment. The hope is that by 2017 the RZR brand will be back on its feet and motorcycles can shine.
What investors will want to watch is the broad economic trends, because motorcycles and off-road vehicles are discretionary purchases that are the first to go in a recession. So far, a decent economy has given customers enough disposable income to buy more from Polaris. And if its products keep meeting the market's needs, this company has a lot of room to grow.
