Polaris Industries (NYSE:PII) is the premier powersports vehicle manufacturer with its off-road vehicles, motorcycles, snowmobiles, utility vehicles, and boats. It's even in the aftermarket parts and accessories market for Jeeps and trucks.

Yet Polaris has faced headwinds in its primary ATV business, as well as in motorcycles. And unfavorable weather cost it sales and market share in snowmobiles.

Smiling family in RZR side-by-side

Image source: Polaris Industries.

Uncertainty is also rising because of the escalating trade war that has seen the EU impose retaliatory tariffs on a range of products, most notably motorcycles. Although Harley-Davidson (NYSE:HOG) was the target, Polaris also has been hit. And tariffs on boats affect Polaris' newest business, Boat Holdings.

Like Harley, Polaris can move some motorcycle production overseas to sidestep the bike tariffs, but it can't do so with its boat business. Fortunately for Polaris, most boats built in the U.S. are sold here, though Canada -- which also imposed tariffs -- is a growing market.

There are suddenly a lot of moving parts with Polaris, so let's see whether an investor should consider its stock.

ATV sales are still climbing

Even with a slowing ATV market and vehicle recalls due to shoddy manufacturing practices almost too numerous to mention, Polaris still owns the off-road vehicle market, with its Ranger, RZR, Sportsman, and General vehicles all holding a No. 1 market share position in their respective categories.


Sales were up 17% in the second quarter to $991 million, though most of that was driven by parts, garments, and accessories. Still, retail sales were up in the mid-single digit percent range as its side-by-sides and ATVs even more market share, Polaris expects the momentum it built up exiting the quarter to continue into the third, though it will face a difficult year-over-year comparison. Last year retail sales soared by mid-teen percentages.

Motorcycles still holding throttle open

The dramatic falloff in large-engine motorcycle sales that caused Harley sales to fall in 14 of the last 15 quarters has not touched Polaris nearly as much as Indian motorcycles continue to post increased retail sales, which rose by single-digit percentages. However, that is down from the double-digit rate increases it was previously experiencing.

Polaris is also trying to use its domination of flat-track racing to increase sales by developing a street version of its racing bike. The company hired Julie Gilbert as its new chief customer engagement and growth officer. Her task is to reach beyond the current powersports customer demographic -- middle-aged married men -- to attract customers across more demograhics who represent a dramatically larger pool of potential buyers.

Couples waving to passing pontoon boat

Polaris Industries latest acquisition is pontoon-boat maker Boat Holdings. Image source: Bennington Marine.

Tapping into other growth markets

With the acquisition of Transamerican Auto Parts, aftermarket sales quickly became Polaris' second largest segment behind off-road vehicles.

First-quarter sales grew 1% to $220 million, but were held back by weakness in the light-duty truck market. Investors will need to watch this segment, as it could have wide swings in performance. It's still early in the integration process for this acquisition, so it will take a while to see how it plays out.

Also, Polaris recently closed on its acquisition of Boat Holdings, the leading pontoon boat maker with a 26% market share. Pontoon boat sales have been surging because of their versatility as they can be used for fishing, sports, cruising, and day trips. They account for one-fifth of industry sales, and Boat Holdings generated $560 million in revenue last year.

These are lower margin vehicles, however, so Polaris' gross margins are expected to come down 60 to 80 basis points for the full year and it will delay the ability of Polaris to get back to 30% gross margins. But because Boat Holdings has lower operating expenses than the rest of Polaris' divisions, CEO Scott Wine says it doesn't need the same gross margin level to achieve similar operating profits.

Investor takeaway

All of these positives don't necessarily mean Polaris stock is a buy. At 27 times trailing earnings and 16 times analysts' profit expectations for next year, its shares aren't cheap, especially compared to Harley-Davidson. At 11 times free cash flow, Harley's stock trades in bargain basement territory, while Polaris trades at 36 times free cash flow.

It could be argued that with Polaris' rising sales and dominant market share, it deserves those premiums. Yet Polaris Industries faces a two-fold hit on tariffs in motorcycles and now boats, and the savings it achieved in warranty reserves and in improving the quality, delivery and cost of its products was more than offset by the higher import duties. 

It remains a solid business, but with the uncertainty over the trade war and with soft markets in each of its core segments, even with its stock down 10% from where it started the year, I'd say it is not a buy at this point.