Polaris Industries (NYSE:PII) is looking better after a fourth-quarter earnings beat, despite motorcycle sales plunging by double-digit rates. Improvement in sales of off-road vehicles, and its acquisition of Boat Holdings last year, helped the powersports vehicle manufacturer beat Wall Street earnings estimates by a penny per share.

The outlook for the coming year shows investors should expect more of the same. However, profits may be pressured by a combination of higher costs from tariffs, unfavorable currency exchange rates, and higher interest rates.

Young man in a Western hat leaning against a Ranger side-by-side inside a large barn

Image source: Polaris Industries.

Off-road market ready for a rebound

Polaris was able to capture market share again in the off-road vehicle (ORV) segment, which seems to have stabilized. As chairman and CEO Scott Wine remarked on the earnings conference call with analysts, because the industry hasn't experienced any growth for some time, "stabilization is a positive sign."

Segment revenues were up 7% year over year to $1 billion, as sales of side-by-side vehicles rose by mid-single-digit percentage rates in the North American retail market, even though ATV sales were down by a like amount. Considering the overall ORV market was down in the quarter, Polaris exhibiting some strength in certain segments bodes well for the powersports vehicle maker.

Motorcycle sales soft

The same can't be said for the motorcycle segment, where sales of Polaris' quirky Slingshot three-wheeled motorcycle dragged the entire segment down by double digits. Polaris isn't giving up on the Slingshot -- not yet, anyway, as it thinks there's a chance for recovery.

Wine likened the opportunity with the three-wheeler to the one Polaris had with its Ranger ORV when it was first introduced, noting that sales in its first few years on the market were "painful," but it's now a leading model that would have been missed had the plug been pulled early on. Still, Wine is realistic enough not to expect the Slingshot to match the Ranger's trajectory, though he believes it can be a profitable line eventually.

Fortunately Indian Motorcycle continues to grow -- though not in North America, where, much like Harley-Davidson's, sales plunged by double-digit rates, even as Indian picked up market share. The biggest gains are in the middleweight market, as sales of heavyweight bikes tumble.

The market for aftermarket parts was also weak. Transamerican Auto Parts, the Jeep and truck accessories distributor and retailer that Polaris bought in 2016, saw sales dip in the fourth quarter, following a soft market all year long.

Clear sailing in boats

Arguably the most exciting thing happening at Polaris Industries right now is its new boating business. Having acquired pontoon maker Boat Holdings last year, the division added some $280 million in sales in the quarter. On a pro forma basis, sales were up 5% from the year-ago period, and Polaris is expecting sales to grow by mid-single-digit rates for the coming year.

The company is particularly bullish about the growth prospects for the business, so much so that it made another acquisition just before earnings. Polaris acquired Larson Boat Group for an undisclosed sum, though Wine said it was the smallest acquisition the company's ever made. Larson owns a line of popular brands including FX, Striper, and Escape, as well as its self-named line.

Because of Polaris' relationship with engine makers like Yamaha Motor and Brunswick Corporation's Mercury Marine, it believes it has a competitive edge in what it sees as a still-growing global industry.

Trade tensions still a concern

One of the biggest concerns Polaris Industries faces is the continuing impact of the trade war between the U.S. and much of the rest of the world. Tariffs continue to weigh on its financial performance, and the possibility of new tariffs clouds what otherwise would have been a more hopeful outlook.

Polaris is unable to get an exemption from the so-called Section 301 List 3 tariffs, a group of Chinese imports valued at $200 billion that are subject to a 10% tariff. The rate could rise to 25% on March 2, though Wine does not believe that will happen, considering the impact it would have on an economy that he says has a recession looming. Even if the tariffs remain at 10%, Polaris says they are driving most of the $80 million to $90 million increase in tariff costs that it baked into its guidance.

What this also shows is that despite Polaris Industries looking much better this quarter, it still has a long way to go before it turns itself around.

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Polaris Industries. The Motley Fool has a disclosure policy.