Amid slack sales for off-road vehicles and a declining motorcycle market, Polaris Industries (PII 1.93%) is counting on the boating market to provide growth for the powersports vehicle maker as it recently made its second acquisition in the space in the span of a year.
Polaris acquired fishing boat maker Larson Boat Group for an undisclosed sum and immediately began moving the assets to its Syracuse, Ind., facility, where it makes Rinker boats, one of the brands it purchased when it acquired Boat Holdings last May. Polaris also bought a minority position in a tournament fishing organization in November.
Image source: Larson Boat Group.
Hook, line, and sinker
Its latest purchases indicate Polaris is making a bet on fishing, which remains a growing leisure activity. The National Marine Manufacturers Association recently said new powerboat sales in 2018 hit their highest level since 2007, or some 280,000 boats, a 4% increase over the year before. Total annual U.S. sales of boats, marine products, and services was up 5% to $41 billion in 2018, and the NMMA sees powerboat sales growing another 3% to 4% this year.
While boating is in line with the interests of Polaris' existing customers -- it says 30% of them already own a boat -- the powersports vehicle maker is moving further outside its core competency. The move also comes as the company faces stiff competitive pressure from its existing businesses as well as a climate of growing economic uncertainty.
Check out the latest Polaris earnings call transcript.
A heavy anchor
Despite Polaris Industries having once had a presence in watersports, it sold off its personal watercraft and powerboat business in 2004 because of a lack of "commonality" with powersports. That hasn't really changed in the past 15 years, and because its products are very much discretionary in nature, any economic hiccup could hit Polaris particularly hard. This would suggest now may not be the right time to be taking on new lines of business.
Polaris did say the Larson acquisition was the smallest one it's ever made, but after it acquired Boat Holdings for $805 million, its indebtedness substantially increased, giving it less room to maneuver.
To buy the pontoon boat maker, Polaris amended its revolving loan facility to increase the amount available to $700 million as well as increase its term loan facility to $1.18 billion. It also added a master note purchase agreement for $350 million. It now has some $1.8 billion in total long-term debt, capital lease obligations, and notes payable compared to the $865 million it had at the end of 2017, but it only has $183 million in cash and equivalents.
Veering off the path
It's undeniable that the acquisition of Indian Motorcycle out of bankruptcy in 2011 has worked out well for Polaris, but it was in its wheelhouse as it owned the Victory motorcycle brand before closing down production. Yet even it cannot escape the sharp downturn in the industry, and sales of Indian fell by double-digit rates in North America in the fourth quarter, the first time since the brand hit dealer showrooms in 2013 that Indian sales fell.
Polaris' acquisition of TransAmerican Auto Parts (TAP) in 2016 for $665 million hasn't turned out nearly as well. Aftermarket segment sales declined 14% in the fourth quarter, and performance has been, at best, lackluster since the purchase. This, like the recent boating acquisitions, was seen as a somewhat complementary business but really beyond the company's area of expertise. Polaris is a vehicle manufacturer, not a retailer, and it is finding the new landscape difficult to navigate.
Although branching off into boat building shows management's willingness to extend the boundaries of the powersports market and invest in lines that could offer potential growth that might offset declines in its core business, it risks running off in too many directions at one time.
Polaris Industries has overwhelming market-leading share in off-road vehicles, snowmobiles, and utility vehicles, and it has been able to peel off substantial share in motorcycles. But each of those markets face an uphill climb today, and deciding to venture off into party and fishing boats could leave investors with a sinking feeling if those businesses get swamped, too.
