Polaris Industries (PII -2.27%) has performed amazingly as a stock, soaring more than tenfold from its lows during the recession of 2008 and 2009. Yet over the past couple of years, Polaris has lost a lot of ground, giving up even larger gains as the company paced operational difficulties. Going forward, bullish investors optimistic that Polaris can get over its problems and return to its impressive growth trajectory. In particular, the following three catalysts could help Polaris regain lost ground and start climbing again.
1. Quality control efforts could finally result in fewer recalls
The biggest single issue that Polaris has had to deal with lately has been a big increase in the number of recalls of its products. The most recent recall involved 35,000 ATVs sold in Australia, New Zealand, and Europe, but many other recalls have affected sales of its Slingshot three-wheel motorcycles, RZR off-road vehicles, and Indian motorcycles. Adding insult to injury, the company recently had to rerecall certain models because the proposed repair from the initial repair was insufficient to resolve the problem. Safety issues have also led to litigation and other potential hazards for Polaris.
Polaris understands the seriousness of the situation, and it is working hard to improve its internal quality control. As CEO Scott Wine explained during last quarter's conference call, "We continue to strengthen our capabilities to deliver the level of performance our stakeholders demand. We have the fundamentals in place, and the global product and safety and quality team continues to improve our processes and our procedures." If those efforts eventually lead to fewer recalls, then the stock should climb back from its recent recall-induced losses.
Image source: Polaris Industries.
2. Greater adoption from younger generations
One strength that Polaris has had historically is that its customers have tended to be relatively well-off with disposable income to spend. Indeed, when Polaris chose to get into the motorcycle market, one of the reasons it stated was that a majority of its customer base were baby boomers. From a longer-term perspective, however, appealing only to boomers could be disastrous if Polaris can't pivot when that generation ages to such an extent that it doesn't want its products anymore.
Polaris could learn a lesson from the recreational vehicle industry. For years, RVs had a reputation for being something that only baby boomers would appreciate. More recently, though, RV manufacturers have successfully built up their appeal to younger customers. Although the short-term impact has been a hit to margins as entry-level RV sales have less built-in profit than more decked out, highly marked-up products, RV manufacturers hope that these younger customers will eventually graduate to models that will lead to repeat business and wider profit margin going forward. With a wide range of products that can appeal to younger consumers, finding ways to bridge the gap and sell to millennials would go a long way toward ensuring Polaris' long-term future.
3. A sooner-than-expected dividend increase
Amid all of its recent difficulties, Polaris has put together a strong long-term track record of dividend success. The company made its 22nd consecutive annual dividend increase earlier this year, boosting its payout by more than 5% to $0.58 per share. That gives Polaris a solid yield of 2.6%.
Most investors don't expect much more from Polaris in the dividend arena because of the hit to earnings that recall-related costs have on its overall income. Currently, Polaris has a payout ratio in excess of 90%, and that precludes sustained dividend increases beyond minimal levels. Yet if earnings are poised to rebound, then a larger dividend would be sustainable. Making that move now rather than waiting until early 2018 could send the message that Polaris is confident in its future.
Polaris stock has climbed considerably over time, and bullish investors are certain that it will again. Despite its recent woes, Polaris has opportunity to regain lost ground and make shareholders happy once again.
