Considering all that went wrong for Polaris Industries (NYSE:PII) last year, 2017 can't help but be better, right? From an industry slowdown in its primary powersports vehicle market to product recalls across almost all of its product lines, Polaris suffered numerous setbacks.
Not that it was necessarily reflected in its stock price, which is up 27% over the past year, but operationally 2016 wasn't exactly a shining moment in Polaris' history. But here are three reasons why the coming year could be great.
Recalls become a thing of the past
As CEO Scott Wine noted not too long ago, the seemingly never-ending recalls of its vehicles was an all-consuming problem for the powersports vehicle manufacturer. The recalls Polaris initiated were:
- 133,000 RZR 900 and RZR 1000 side-by-sides from various model years
- 43,000 Ranger 570 recreational off-highway vehicles (ROVs)
- 13,000 RZR XP Turbo and RZR XP 4 Turbo ROVs
- 42,500 Ranger XP 900, XP 900 EPS, and CREW 900 ROVs
- 9,900 Sportsman 570 Touring and X2 ATVs, plus Sportsman 570 6x6 ATVs
- 23,700 Indian Chief Classic, Chief Dark Horse, Vintage, Chieftain, Chieftain Dark Horse, Roadmaster, and Springfield motorcycles
- 24,655 Slingshot motorcycles
That's a heckuva lot of vehicles to have to bring back for repair, particularly since most carried a risk of fire. It also suggests there was a common linkage that broke in the manufacturing process. While it has cost Polaris more than $120 million in warranty and legal costs so far -- and with another recall to start off the year indicating the expenses will linger for a while longer -- it has hired personnel to take responsibility for the problem and is changing processes to eliminate it altogether. The company suggests repeated recalls may soon be in its rearview mirror, a development that, if it holds, can help restore faith in its brands and in their profitability.
Success breeds success
While its Indian brand of motorcycles also had a late-year recall, they remain extraordinarily popular with bike buyers. In its just reported fourth-quarter earnings statement, Polaris said retail sales of the nameplate continued to grow at double-digit rates for the period, up in the mid-20% range, even as the market for bikes 900 cubic centimeters and above fell by low-single-digit rates.
Polaris' ability to take market share from industry leader Harley-Davidson (NYSE:HOG), which has yet to post a single quarter of higher motorcycle sales in three years, shows why the powersports vehicle maker chose to wind down its Victory motorcycle brand and focus all of its attention on Indian.
Victory has been around for 18 years, but it's been generating massive losses -- some $100 million in total -- not profits, like Indian. The brand has a loyal following, but it's significantly smaller and Polaris couldn't afford to keep pouring money into it.
But that's good news for investors, because it means the company will be letting its winners run while cutting its losses where it can. Although like the powersports market the motorcycle industry is weakening, Polaris itself can continue bucking the trend.
New markets to explore
Polaris Industries' acquisition of Transamerican Auto Parts opens up all new possibilities for it. Having never been in the retail market before, Polaris will now have a network of 75 stores and six distribution centers that sell aftermarket parts and accessories for off-road Jeeps and trucks. That's obviously a very complementary business to its powersports vehicle market, one that it can organically expand upon. With a $10-billion-plus market opportunity, Polaris says the deal gives it immediate leadership in the space.
Over the past three years, Transamerican had 15% compounded annual growth in revenue, hitting $740 million at the time of the acquisition. Polaris expects it to be immediately accretive to earnings, and in the fourth-quarter report TAP added $109 million in sales, or 2% of total full-year sales. Polaris anticipates the business will add $0.25 to $0.30 to 2017 earnings, excluding inventory accounting and acquisition costs.
Good times could be here again
While all of these factors carry risks, and could actually work against Polaris Industries, the powersports vehicle manufacturer has operationally been at a low point, and any improvement should make 2017 its best year yet.