For motorsports enthusiasts, Polaris Industries (NYSE:PII) has a lot to offer. Having started out with an emphasis on the snowmobile segment, Polaris has grown over the years to expand its range of offerings, boasting exposure to the off-road vehicle, motorcycle, and a smorgasbord of other related products and accessories. Yet lately, the company has experienced more challenging conditions in the industry, and that has led to some uncertainty about the stock's prospects in the future. Below, we'll take a look at some of the risks Polaris is dealing with right now and whether investors should be particularly worried about them going forward.
Valuations in the overall stock market have been inching higher, and at Polaris, the current situation is somewhat mixed. In terms of trailing earnings, Polaris has seen a bottom-line slump, and that has sent its trailing earnings multiple up into the mid-30s. For instance, in its most recent quarter, Polaris reported solid sales gains of more than 17%, but the company still suffered a slight loss that translated to $0.05 per share.
Looking forward, though, Polaris looks more promising from a valuation standpoint. When you incorporate expectations for a near-term profit rebound, Polaris shares trade at 17 times forward earnings estimates, which is much more in line with the broader market. That doesn't necessarily give Polaris a huge margin of safety, but it does make an argument that the stock isn't overvalued.
Part of the appeal of Polaris to investors is its dividend. The stock currently carries a dividend yield of 2.7%, and Polaris has done an excellent job of keeping its payments to shareholders rising over time. The company boasts a 22-year streak of consecutive annual dividend increases, including the most recent boost earlier this year of just over 5%.
Earnings pressure has had an adverse impact on Polaris' payout ratio, though, and the company now pays almost 90% of its earnings to its shareholders. However, if the company's projections prove to be correct, then the anticipated rebound in Polaris' bottom line should return the payout ratio back to a more comfortable 40% to 50%. That in turn should set the stage for more dividend increases in future years.
One measure of risk is how much a stock moves in relation to the market. Some stocks are more volatile than the overall market, while others tend to have calmer moves. Neither attribute is good or bad in itself, but when investors fear a possible correction, the prospect of having less exposure to a potential downdraft in stock prices looks attractive.
Polaris has recently been a bit more volatile than the overall market, weighing in with a beta of 1.05. However, as you'll see below, the motorsports equipment specialist has seen plenty of company-specific news that has kept its correlation with the overall market lower than it might otherwise be. Investors shouldn't see Polaris as being particularly conservative, but it's not among the highest-risk stocks in the market, either.
Finally, the most important risk to consider with a company is that of its core business, and that's an area where Polaris has had to deal with a variety of issues. Recalls have plagued the company in recent years, with incidents including the following:
- In late 2015, the company recalled 4,700 snowmobiles because of steering problems that had the potential to cause loss-of-control accidents. Polaris also recalled 2,200 RZR XP Turbo off-road vehicles because of oil leaks.
- In early 2016, Polaris did a large recall of 133,000 RZR 900 and RZR 1000 side-by-side vehicles because of concerns about potential fire. One death had resulted from an incident in which a RZR vehicle overturned and a fire ensued.
- Later in 2016, Polaris chose to do recalls of its Slingshot three-wheel motorcycle following concerns about control.
- Late last year, the company recalled nearly 24,000 of its Indian model motorcycles because of potential fuel leaks.
- Earlier in 2017, Polaris recalled 13,500 RZR and General vehicles for engine misfiring and possible brake-related problems. In addition, 19,200 Sportsman ATVs were recalled because of faulty heat shields and potential exhaust leaks.
In addition, Polaris has recently been sued by the families of two riders of a Ranger 800 vehicle who died when their vehicle overturned, causing gasoline to spill from the fuel tank and then catch fire.
Recalls and product liability are a fact of life in the motorsports industry, and Polaris hasn't suffered any considerable drop in market share yet. But investors remain nervous about the frequency of the issues Polaris has encountered, and the company's management will need to work harder to reassure customers and investors alike that it can boost its quality control and get itself moving forward again.
Polaris has plenty of growth potential, but it's far from a no-risk stock. Investors need to understand the risks involved with Polaris and weigh their risk tolerance against the potential long-term benefits of owning shares of the company.
The Motley Fool owns shares of and recommends Polaris Industries. The Motley Fool has a disclosure policy.