As an investor, when I think of companies that make expensive recreational items such as ATVs and motorcycles I think of earnings cyclicality. That is when the overall economy goes into a recession then the revenue and cash flow of those companies are going to go down with it. I researched three companies that are known for making ATVs and motorcycles. Polaris Industries (NYSE: PII) which makes ATVs, motorcycles and snowmobiles with the majority of their revenue coming from ATVs, specifically side by side four wheelers. Arctic Cat (NASDAQ: ACAT) a traditional snowmobile maker also makes ATVs but a higher percentage of sales comes from snowmobiles than Polaris. Harley Davidson's (NYSE: HOG) revenue is exclusively comprised of motorcycles and merchandise pertaining to their brand. I discovered that Polaris Industries leads on several fronts.

ACAT Free Cash Flow TTM data by YCharts

Polaris Was Cash Flow Positive during the Recession

Of the three companies I researched Polaris Industries was the only to remain cash flow positive during the recession (see chart above). If I was to invest in a cyclical company I would invest in a company that can generate cash flow in bad times.

Good at Executing their Strategies

In Polaris's annual reports going all the way back to 2008, they enthusiastically talked about the Maximum Velocity Program where a dealer can order two times a month versus two times a year. The idea behind this program was that if a dealer was to sense a change in tastes from the retail consumer, the dealer can adjust their orders accordingly within a shorter ordering cycle. This allows Polaris to use their flexible manufacturing to change over to a new product line quicker and get the needed product to the dealer and thus the retail customer quicker.

Arctic Cat's verbiage in their annual reports during the recession emphasized cost cutting and increasing manufacturing efficiencies and reducing the dealer inventories. If Arctic Cat attempted to do the same things as Polaris they didn't execute nearly as well.

Emphasis on Engineering and Technology is the Key to Delivering a Superior Product

In their annual reports, Polaris brags about award winning chassis and developing effective lightweight vehicles for the military and their competitive advantages in power trains. They also talk about making their snowmobiles lighter and more effective as well. This tells me that engineering and technology plays an important role in developing a superior product. In the 2011 Polaris proxy, the list of board of directors are is made up of people with expertise in logistics and engineering such as Mark Shreck who is a professor at the Speed School of Engineering at the University of Louisville and is a retired Vice President of Technology from General Electric. Annette Clayton, who is a vice president of global supply chain for Schneider Electric and former supply chain executive at Dell Computer, is also on their board. Another board member is from a company that makes paint. So, they have leadership with specific backgrounds that can help Polaris succeed.

Some Products Are Practical

Some ATVs are equipped with mini truck beds. This makes them more practical than a motorcycle. This is something that Polaris and Arctic Cat have over Harley Davidson.The practicality of their products has driven growth in military demand. Motorcycles are mainly to joyride and travel. You can't haul hay or loose grass on a motorcycle. Polaris's motorcycles sales was 5% during 2008 so they didn't experience a downswing in their cash flow like Harley Davidson during the recession.

Conclusion

A company that can do well in difficult times can do even better in good times. As we move further from the last recession Polaris will continue to leverage their manufacturing and dealership efficiencies. They have already achieved their goal of being #1 in the power sports market. Their more leisure oriented product lines such as motorcycles and snowmobiles should fare better and help boost the bottom line even further. I think the market is already reawakened to their achievements. Polaris is up 38% year to date and the P/E ratio is around 21 as of this writing on Aug. 31. If you want to assume some extra market risk and buy now you can enjoy a 1.9% dividend yield which is about 28% of 2011 free cash flow while you wait for superior capital gains. I wouldn't buy at this price because of the higher P/E ratio; however, I am putting this on my watch list and wait for a better entry point.