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Better Buy: Polaris Industries Inc. vs. Arctic Cat

By Dan Caplinger – Sep 22, 2016 at 1:34PM

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Which off-road vehicle manufacturer is the stronger pick in the industry today?

Millions of people like to do motor sports, and all-terrain vehicles, snowmobiles, and other types of vehicles help them follow their passions. Polaris Industries Inc. (PII -6.25%) and Arctic Cat (ACAT) have sought to tap into the demand from those hobbyists, and over the long haul, they've made some success in generating profits. Yet for investors, both Polaris and Arctic Cat have left something to be desired over the past year, and value investors wonder if now's the time to step in. Let's take a closer look at how Polaris Industries and Arctic Cat compare based on some popular metrics to see if one or the other would make a good pick for your portfolio.


Image source: Polaris Industries.

Stock performance and valuation

Both Polaris and Arctic Cat have seen their shares punished lately. Since September 2015, Polaris stock has lost 40% of its value. Arctic Cat has more or less matched that performance, with a 39% drop being functionally identical over the past 12 months.

It's a bit hard to compare the two ATV companies based on traditional earnings valuations, in large part because of the challenges that Arctic Cat in particular is facing. Over the past 12 months, Arctic Cat has posted a net loss, and so its trailing earnings multiple is meaningless. Polaris, on the other hand, has managed to produce a profit, and it trades at 13 times its trailing earnings.

Even when you incorporate near-term future prospects, Arctic Cat still doesn't look much better. Investors expect a modest profit, but that leaves Arctic Cat still sporting a forward earnings multiple of more than 100. By comparison, Polaris investors expect a mild drop in future earnings, but it still trades with a forward multiple of just 14. Based on this simple valuation method, Polaris looks more favorable than Arctic Cat.

Dividends

For dividend investors, there's only one choice between these stocks to get regular income payments. Arctic Cat had a long and fairly impressive history of paying dividends to its shareholders, but its last declared dividend came in late 2015. Since then, the company hasn't made any payouts, and that elimination was at least partially responsible for the share price decline that Arctic Cat has suffered.

By contrast, Polaris still pays a healthy dividend of more than 3%. Moreover, it has an even longer history of treating shareholders well, with 21 straight years of rising dividends. The financial pressure that Polaris is under led it to limit its increase to just 4% this year, which was less than the double-digit pace it had managed for several prior years. Yet with a better-demonstrated commitment to income investors, Polaris is the natural choice over Arctic Cat in the dividend category.

Growth prospects and risk

Both Arctic Cat and Polaris Industries have faced business challenges that are primarily responsible for their poor stock performance recently. Arctic Cat has been working for a while at trying to implement new strategies to reinvigorate growth, including strengthening its network of dealers, offering new product launches that will meet the needs and desires of its end-user customers, looking for strategic partnerships, and doing a better job in marketing its brand. In its most recent quarter, Arctic Cat lost more money than even it had expected, and although some timing issues related to snowmobile shipments were partially responsible, the tough retail environment forced Arctic Cat to spend more on promotional efforts than planned. CEO Christopher Metz noted that the power-sports market has been weak, which is somewhat surprising given cheap fuel prices and greater discretionary income among potential customers, but Arctic Cat expects better results later in the fiscal year.

For Polaris, recent results have been a little more encouraging, although it has also had to deal with many of the same industry problems as Arctic Cat. In its most recent quarter, Polaris eked out a slight sales gain of less than 1%, but net income fell by almost 30%. North American retail sales were especially weak, falling 7% due to overall industry sluggishness and a recall of one of its products. Yet Polaris' motorcycle segment bailed out the company by posting strong growth of more than 20%, and international sales were also better than the company's domestic results. Like Arctic Cat, Polaris is working on new product launches and hopes that they will match up more closely with what customers want.

Both Polaris and Arctic Cat have been under pressure lately, and both have prospects to bounce back. Polaris will be the better buy right now for most investors, largely because of its greater success in remaining profitable and rewarding investors with dividend income.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and 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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Stocks Mentioned

Polaris Industries Inc. Stock Quote
Polaris Industries Inc.
PII
$97.65 (-6.25%) $-6.51
Arctic Cat Inc. Stock Quote
Arctic Cat Inc.
ACAT

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