Despite persistent setbacks over the past year or so, Polaris Industries (NYSE:PII) has remained remarkably resilient. Although it's been plagued by recalls across virtually all of its product lines, shares of the powersports vehicle manufacturer trade about 10% higher than they did a year ago.
It doesn't look like there's an end in sight anytime soon to the recall issue, and the financial impact will last longer than the manufacturing problems themselves, but here are four reasons Polaris Industries stock could rise further in 2017.
Dousing the fire
Obviously, one of the big catalysts for seeing the RZR maker's stock go up this year would be getting the "thermal hazard" problem finally nailed down. Last year, CEO Scott Wine had suggested the problem had been identified and the issue would soon be in the rear view mirror, but as we saw time and again in 2016, risks of fire leading to product recalls erupted over and over again.
Polaris's just-released fourth-quarter results showed how this is hurting profits. Adjusted gross margins fell 165 basis points in the period, but they were down more than twice as much for the full year. While some of that includes promotional costs (it had to discount heavily to bring in customers) and currency exchange rates, higher warranty expenses were a significant drag.
Still, getting the matter in hand would provide a lift to the shares because, even if it did mean there were still going to be expenses related to recalls hurting the bottom line going forward, investors would at least know there is an end in sight to the constant conga line of announcements alerting buyers of yet another defect.
Powering up the industry
Another concern holding back Polaris Industries stock is the fact that the powersports vehicle industry itself is in a slump. Booming oil and gas prices before the commodities rout in 2015 helped boost demand for its ATVs and side-by-sides in energy-dependent states, both for business and personal use. When drillers idled their rigs, they had little need to purchase new vehicles.
Similarly, agricultural states make up about 20% of the off-road vehicle market, and it too has been weak from the same slump that hit all commodities causing farmers to avoid buying new vehicles.
However, there could be a u-turn coming. Oil industry services company Baker Hughes reports the number of rotary rigs in operation in North America is up almost 10% from a year ago, to 1,038, while those on land are up more than 10%. And while the country is still awash in wheat, corn, and soybeans, prices seem to have stabilized. While some analysts aren't hopeful that pricing will be rising anytime over the next year or so, at least the sharp drop these crops have experienced the past two years seem to have abated.
Oil- and ag-dependent states might not be going on a spending spree anytime soon, and Polaris admits it was barely better in the fourth quarter, with sales in those states down in the low teens, but with the hemorrhaging over with, that alone could help boost Polaris's stock. And the powersports vehicle maker has its fingers crossed that the back half of 2017 will see improvement.
Focusing on what's winning
Motorcycles have been the real bright spot in Polaris's portfolio, recording triple- and double-digit gains over the past few years. And though the industry is also weakening markedly, as Harley-Davidson's sagging sales show, Polaris has operated from a position of strength, regardless.
The reason has been the Indian Motorcycle's nameplate and demand, though perhaps not as white-hot as it once was, remains robust. And now that Polaris has decided to fold the Victory brand and focus all of its resources on Indian, its motorcycle segment should benefit from the increased attention.
Certainly the move was a bit of a surprise, considering Victory had just started to gain traction once again, and Polaris had introduced the entry-level Octane bike to very positive press, but it was a smart decision for the bike maker, and its stock should get a lift as a result.
The rationale behind winding down Victory was, according to CEO Wine, because it just didn't have the financial resources to do everything, and "with cumulative losses exceeding $100 million in growing, we could not continue to invest in the brand."
New growth opportunities
The recent acquisition of Transamerican Auto Parts, an aftermarket parts and accessories dealer for trucks and off-road vehicles, is both a complementary business and an exciting new venture that takes Polaris into the retail market for the first time with a network of 75 retail stores and six distribution centers.
Polaris has a lot on its plate at that moment that demands the full attention of management, and integrating a new business could cause it to take its eye off the ball, which is why I thought it was a good deal at the wrong time. However, if the powersports leader proves it can successfully mesh the two businesses together, it will be a new source of revenue that will help it grow.
Polaris Industries is the leading company in most of the markets it serves, and the issues that undermined its performance last year should ultimately be transient in nature. If any or all of the concerns outlined above work themselves out, investors will likely see Polaris's stock rising further in 2017.