Is Polaris Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Polaris (PII -1.49%) fit the bill? Let's look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Polaris's story, and we'll be grading the quality of that story in several ways:

• Growth: are profits, margins, and free cash flow all increasing?
• Valuation: is share price growing in line with earnings per share?
• Opportunities: is return on equity increasing while debt to equity declines?
• Dividends: are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's look at Polaris's key statistics:

PII Total Return Price data by YCharts

Source: YCharts.
*Period begins at end of Q2 2010.

PII Return on Equity data by YCharts

Source: YCharts.
*Period begins at end of Q2 2010.

How we got here and where we're going
Polaris doesn't quite come through with flawless performance, but six out of nine possible passing grades is a strong showing nonetheless. Polaris' net income has far outpaced the growth in free cash flow, and its share prices have lapped net income as well, which may indicate an excess of enthusiasm that could result in underwhelming returns going forward. Is this divergence a warning sign or a temporary setback, soon to be overcome? Let's dig deeper to find out.

Polaris recently launched its MV850 ATV "non-pneumatic tire," which was developed by recent acquisition Resilient Technologies. Fool contributor BA McKenna notes that Polaris has already begun deliveries of its MV850 ATV tires to the U.S. Special Operations Forces, and the company also has a contract of indeterminate value to supply customized MV850 ATV tires to the German military. The company also plans to offer these tires for commercial and sporting purposes by 2014, which may present a challenge to other airless tires manufacturers. Management has high hopes for Polaris' defense division, which could become a $200 million business within the next couple of years. This optimism is supported by the recent award of a $382.5 million contract from the Department of Defense to Polaris' defense subsidiary for a number of ATVs, which is expected to run through 2018.

Fool contributor Dan Caplinger points out that Polaris has been able to diversify away from snowmobiles into motorcycle sales, and these recreational vehicles offer huge growth potential in the near future -- provided the economy continues to improve for the American middle class. Polaris acquired Indian Motorcycles, America's first motorcycle company, in 2011, which put it in direct competition with Harley-Davidson (HOG -0.76%). Polaris recently introduced its 2014 Indian Chief models, which were designed, engineered and manufactured exclusively by Polaris. These new bikes drew rave reviews from Cycle World when they debuted at Sturgis this summer , with many direct favorable comparisons to the legendary Harley cycles: one bike owner's new Indian "has not only been accepted by the Harley crowd, it's revered." That's great news for Polaris, which went from drawing board to full production in just over two years, but it's dangerous for the more specialized Harley.

However, Polaris has recently recalled its Kings Mountain-era Indian motorcycles, designed by the previous owners, because of the possibilities of defective rear rim. Fool contributor William Bias notes that this recall may hinder the prospects of Polaris's 2014 models, but consumers ought to be informed enough to distinguish between the new wow-factor Indians and the recalled models. In order to preserve its reputation with consumers, Polaris has started offering an "Indian Motorcycle Assurance Program" to its 2014 Indian customers.

Putting the pieces together
Today, Polaris has many of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.