Polaris Industries (NYSE:PII) is looking cheap again, just like it did two months ago. I've had this company firmly on my watch list for more than a year, so let's see how the company did this quarter and this year, and what's expected next year.

The company reported fourth-quarter and fiscal 2005 earnings this morning of $1.03 and $3.29 per diluted share, respectively, which is a decrease of 2% for the quarter, but an increase of 8% for the year. On the sales front, all-terrain vehicles (ATVs), motorcycles, and parts and accessories all turned in gains. The motorcycle division, the company's smallest business, continued its torrid growth with a 56% increase in sales for the quarter and a 34% increase for the year. But snowmobiles, the company's second-largest business, saw sales decrease by 29% for the quarter and 11% for the year.

According to the company, inventories at its dealers still remain higher than usual, and it will take a few quarters for dealers to work down the inventories. The inventory problem started in the first quarter and reached its worst point during the company's third quarter, when inventories ballooned to $249.9 million, which was an increase of 5.5% sequentially and 26% year over year. Both the sequential and year-over-year increases are higher than seasonally normal for the company's third quarter. In the fourth quarter just past, the company's inventories declined to $202 million, but this still represents an increase of 16.4% on a year-over-year basis. Sequential inventory declines in the fourth quarter are seasonally normal for Polaris, but $202 million in inventory is still high. Still, the year-over-year increase is less than what occurred in the third quarter, and may be a sign that the company is making some progress on reducing its inventories.

On the bright side, the company's balance sheet is still healthy with a low debt-to-equity ratio of around 5%,and the company historically delivers sufficient free cash flow to fund its share repurchases and dividend payments. Last week, the company increased its dividend by 11%. Shareholders will see that increase when the first-quarter dividend is paid on Feb. 15.

Depending on whether you're looking at Polaris' motorcycles, snowmobiles, or ATVs, it makes sense to include Harley-Davidson (NYSE:HDI), Arctic Cat (NASDAQ:ACAT), and Honda (NYSE:HMC) as competitors. At the moment, the market isn't enamored with any of the four; all trade with P/E multiples between 12.2 and 16.5. Honda and Polaris bring up the rear with P/E multiples of 12.2 and 15, respectively. Given that Polaris only expects to grow income from continuing operations in the 3% to 7% range next year, a P/E multiple of 15 isn't unreasonable. Neither is it dirt cheap.

I think Polaris is a well-managed company, and I don't wish any ill toward Polaris or its shareholders, but I don't think the stock is a buy right now. I do plan to keep this company on my watch list. Given the company's cyclical businesses, I want a large margin of safety before buying, and that won't happen until everybody and their mother hates the company's prospects. While the sentiment toward the company isn't all that bright right now, I think the level of disinterest I'm looking for might only present itself during a recession, but I'm willing to wait and see.

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Nathan Parmelee has no financial stake in of the companies mentioned. The Motley Fool has an ironclad disclosure policy.