In three of the last four quarters, ATV, motorcycle, and snowmobile maker Polaris (NYSE:PII) has successfully nailed the earnings targets set for it by analysts. The one time it missed, it did so by just a penny. On Thursday, Polaris aims to continue this streak of (suspiciously) remarkable consistency, as it reports its Q3 2006 numbers.

What analysts say:

  • Buy, sell, or waffle? Eleven analysts follow Polaris. Four of them think the stock's a buy; seven argue it's a hold.
  • Revenues. On average, they're looking for a 5.5% decline in sales to $513.2 million.
  • Earnings. Profits are expected to fall pretty much in tandem, to $1.06 per share.

What management says:
When I last looked at Polaris, I spent some time discussing the reasons for its tie-up with motorcycle maker KTM, in which the firm had recently acquired a 25% stake and was considering acquiring a controlling stake. In July, though, Polaris announced that this is not going to happen. In a joint press release issued with KTM and its majority owner, Cross Industries, Polaris advised that because Cross wishes "to remain in control of KTM and for KTM to remain an independent company," it is not interested in selling its stake to Polaris.

This has to be taken as a negative for the stock, because, as mentioned back in April, "Motorcycles are one of Polaris' best business opportunities." When the firm reported its Q2 earnings in July, for example, it admitted that both ATV and snowmobile sales had declined in the quarter -- even as Victory-brand motorcycle sales rocketed 26%.

What management does:
That's a pity, because Polaris could really use a catalyst for growth at this point. For the past year, its gross, operating, and net margins have been on a long, slow slide. Nothing's cratered, granted, but the trend continues downward as lower sales volumes make it hard to maintain the manufacturing efficiencies that yield strong gross margins.

Margins %




























All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
In the first half of 2006, Polaris saw its sales fall 10% in comparison to the same year-ago period. Cost of goods declined only 9%, however, which explains why you see gross margins falling in the table above. A more significant problem, though, is that selling, general, and administrative costs are falling even more slowly than sales -- down just 6% in the same period. None of this is good for corporate profits. Meanwhile, inventories are down just 1% on average -- again, a bad number. (You ordinarily want inventories to rise less than sales when the latter are climbing, and fall more than sales when the latter are sagging.)

While we'll want to keep an eye on all these trends in Thursday's news, I do think that Stephen Simpson made a good point when reviewing the firm's earnings news last quarter: "You don't produce year after year of exceptional returns on capital by sheer luck or a fluke." Over the past five years, Polaris has only once produced a return on equity of less than 40% (just barely), and never produced a return on invested capital of less than 30%. These are stellar numbers, folks -- the kind that speak of a quality business lying beneath the recent round of disappointing sales news. Whatever news Thursday brings, I suspect this is a stock that can reward long-term buyers richly.


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Fool contributor Rich Smith does not own shares of any company named above.