Polaris Industries' (NYSE:PII) motorcycle division often gains the most media attention among the company's segments, if for no other reason than its position as David to Harley-Davidson's (NYSE:HOG) Goliath. But this business represents just 13% of company sales, and ultimately is overshadowed by the off-road vehicle segment, which accounts for nearly two-thirds of the total company revenue.
The vehicle maker's first-quarter earnings show Polaris really is a well-rounded business, and all of its divisions are a key to the whole. Its motorcycles are flashy -- and 74% year-over-year quarterly revenue growth is remarkable -- but Polaris' performance will still be directed by its ORVs.
Sales there were up a solid 11% year over year, hitting $645 million as Polaris' industry-leading Ranger and RZR side-by-side brands gained traction despite a heavy promotional environment in the industry that kept its market share flat in the quarter.
Similarly, revenue spiked by 12% in Polaris' second-biggest segment, parts and accessories, driven mainly by the increased sales of ORVs and motorcycles, but also its global-adjacent markets, which include sales to the government and military, as well as various national accounts that it defines as work and transportation.
Defense sales were up sharply by double-digit percentages as its Dagor and MRZR vehicles gained customers, with additional shipments to U.S. and international special forces boosting global sales. Work and transportation revenues jumped higher by mid-single-digit percentages as a partnership with outdoor power equipment manufacturer Ariens took off and added to its own direct sales.
Where the rubber hits the road
Of course, it's the motorcycle business many like to talk about, and here we find Polaris firing on all cylinders.
Sales of the Victory and Indian brands, and of its new Slingshot side-by-side motorcycle were all higher year over year. The first two brands were up 40% themselves, but when adding in the new vehicle design, the gains were actually double those from a year ago.
Slingshot sales were much stronger than expected -- I saw my first one on the road just last week -- and the Victory brand realized sales and market share gains in the quarter, but the Indian nameplate was most impressive. The heavyweight 1400 cc segment's sales spiked by 60% jump at retail as more dealers were added to its network, and the new, more affordable Indian Chief Dark Horse was introduced to help maintain momentum.
The wrench in the machinery
Yet as good as the quarter was, Polaris is still trying to work out problems from its torrid pace of growth. Such wrinkles often hinder -- and sometimes undermine -- a company's ability to maintain that pace.
Polaris admitted that for all the good work it has done, inventories in its factories remain too high, particularly in the off-road vehicle segment, and it continues to experience production inefficiencies in the motorcycle division that kept it from performing up to its capabilities.
It is implementing its new retail flow management system, or RFM, which is primarily for its Victory motorcycles but which it started using at ATV dealerships late last year. The system allows dealers to place orders daily and should eventually reduce how long it takes to fulfill the order to somewhere under 18 days.
Until then, however, inventories are elevated, particularly at 17% higher overall in North America. While Victory inventory is down to low double-digit percentages -- an effect of the RFM system perhaps -- it's up in the mid-20% range for snowmobiles (due to lower snowfall in certain key regions, which hampered sales); 20% higher in motorcycles; and in the midteens for ORVs.
Getting a handle on such inventory issues is a prime focus for management for the rest of the year, as is reducing the production delays that held back sales of its popular Indian Scout motorcycle -- dealers remained sold out. On its conference call, Polaris noted shipments and sales have picked back up this month and management expects them to accelerate going forward .
The star on the horizon
From new designs, new models, and new partnerships, Polaris Industries has opened the throttle on growth. It allowed the vehicle maker to raise the lower end of its full-year earnings guidance to a range of $7.27 to $7.42 per share, as much as 12% over its previous range of $7.22 to $7.42 per share.
Analysts, though, thought it might do somewhat better, which likely explains why its stock initially surged higher on the report, but then gave back most of those gains. Polaris Industries isn't cheap at 20 times earnings estimates and twice its sales, but with a valuation equal to Harley-Davidson's based on their earnings growth potential, it is the better value.
Momentum is moving away from Harley and to Polaris, and is more than bolstered by sales of off-road vehicles and snowmobiles. Two new acquisitions also provide opportunities for some excitement, and though I'd prefer to buy it at a discount, this remains a powersports leader ready to move.