Motorcycles are an American icon, and investors have long sought to take full advantage of the business opportunities involved in capitalizing on that icon. For Harley-Davidson (NYSE:HOG), motorcycles are the company's identity, and it has created a Top 100 global brand from the name recognition that its namesake product line has. Polaris Industries (NYSE:PII) has a stronger reputation for off-road and winter sports vehicles, but its purchase of Indian Motorcycle helped add to its motorcycle exposure, supplementing its Victory brand. Neither stock has done all that well lately, and value investors looking to get into the space want to know which one is the smarter play right now. Let's take a closer look at how Polaris Industries and Harley-Davidson compare based on some popular metrics to see if one or the other would make a good pick for your portfolio.
Stock performance and valuation
Both Polaris and Harley-Davidson have seen their shares lose value over the past year. Since October 2015, Polaris stock has fallen by 37%. That compares to just a 7% decline for Harley-Davidson over the same period, but both companies have seen longer-term slides from their historic highs.
What has many value investors interested in the two motorcycle stocks is that their valuations based on earnings have fallen to attractive levels compared to the overall market. Polaris and Harley-Davidson have almost identical earnings multiples when you look back over the past 12 months, each coming in at a bit above 13. However, a small difference appears when you start to look forward at expected near-term future earnings. On that front, Polaris' forward multiple climbs to 14, while Harley-Davidson weighs in with a price-to-earnings ratio of 12 based on forward earnings estimates. That's a small difference, but it still gives Harley-Davidson a small edge even though its shares haven't fallen as far as Polaris' have.
Another area in which Polaris and Harley-Davidson look quite similar is in their dividends. Polaris currently pays a dividend yield of 2.9%, while Harley-Davidson lags just a bit behind at a 2.8% yield. Moreover, both companies are paying similar portions of their earnings out to shareholders as dividends, carrying payout ratios between 30% and 40%.
Yet one area where Polaris truly stands out is in dividend growth. The company has boosted its dividends annually for 21 straight years of rising dividends, and until this year, Polaris typically gave investors double-digit percentage increases every year. By contrast, Harley-Davidson had to make about a 70% dividend cut during the financial crisis in early 2009, and it took the company until this year to grow its dividend back up above the level where it was in 2008. Income investors will give Polaris an edge on that score over Harley-Davidson.
Growth prospects and risk
Both Polaris and Harley-Davidson have had to deal with less-than-perfect industry conditions lately. Polaris managed to come up with a very small rise in revenue in its most recent quarter, but it suffered a significant decline in profitability. Indeed, it was only the motorcycle segment that managed to post impressive performance, growing at a better-than-20% rate on the top line. Problems with its RZR line of high-performance off-road and trail all-terrain vehicles forced the company to cut its full-year 2016 earnings guidance by $2.50 to $2.70 per share, amounting to a reduction of roughly 40%. Delays in 2017 RZR products, declines in sales of related accessories, and increased marketing costs to reassure customers about the quality of the RZR line were primarily responsible for the reduction, and Polaris will need to find ways to make its entire business rebound to the same extent that its motorcycle line is growing in order to maximize its overall potential.
For Harley-Davidson, recent news has been mixed. In the second quarter, unit sales in the key U.S. region fell 5%, leading to a 2% drop overall. Yet higher pricing helped send sales up about 2%, and a big decline in number of shares outstanding pushed earnings per share higher by nearly 8% compared to the previous year's second quarter. Because of concerns about the overall industry's health, however, Harley-Davidson cut its guidance for full-year shipments slightly. Nevertheless, Harley is happy about its gains in market share despite a sluggish U.S. market, and the international arena has been a driver of growth for the motorcycle manufacturer. At this point, Harley-Davidson seems to have better growth prospects because it doesn't have the overhang of Polaris' RZR line.
Overall, Harley-Davidson looks like a slightly better pick than Polaris Industries right now. Even with a less consistent dividend, Harley has slight edges on valuation and growth prospects, and that could add up to big gains if things go well for the motorcycle maker going forward.
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.