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Why Polaris Industries, Inc. Is Falling After Another Record Quarter

By Steve Symington - Jul 22, 2015 at 12:00PM

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The ATV maker has never been stronger. But this time the market isn't impressed.

In what's becoming old hat for Polaris Industries (PII -2.77%), the off-road vehicle specialist just turned in its 23rd consecutive quarter of record earnings performance. But with shares up around 10% since its impressive results three months ago, it wasn't enough to appease Wall Street.

Polaris' revenue in the second quarter rose 10.9% year over year to $1.124 billion, which translated to a 4.1% increase in net income to $100.9 million. On a per-share basis, net income rose 4.9% year over year to $1.49. However -- keeping in mind Polaris had exceeded analysts' expectations for six straight quarters leading into today's report -- consensus estimates called for higher earnings of $1.58 per share on revenue of $1.16 billion. Shares of Polaris are currently down around 6% in Wednesday's early trading as a result.

To be fair, CEO Scott Wine cited "numerous positive undertones" during the quarter, including "exceptionally high" motorcycle demand. What's more, Wine noted Polaris has made significant progress in its inventory management systems -- a key point of potential improvement he singled out last quarter-which, when combined with solid 11% growth in North American retail sales, helped contribute to deceleration in dealer inventory growth.

Sure enough, Polaris' motorcycle segment turned in the most impressive performance, with revenue jumping 57% year over year to $162.1 million. Meanwhile, the core off-road vehicle business saw sales rise a more modest 2% to $688.8 million, while parts, garments, and accessories revenue climbed 17% to $187.5 million. Next, the "global adjacent markets" segment -- which encompasses the government/military group and Work & Transportation, or W&T, -- fell 3%, to $66.6 million. And finally, snowmobiles revenue skyrocketed 215% to $19.3 million, albeit due primarily to timing of off-season snowmobile production and a higher mix of new premium snowmobiles being shipped to dealers ahead of the key upcoming snowmobile retail season.

Here's the culprit
Also to its credit, Polaris' results include "additional manufacturing costs and inefficiencies approximating $9.0 million," specifically in the form of cost pressure and delayed shipments related to the company's efforts to scale production and add capacity to the paint system at one of its motorcycle facilities. Without these inefficiencies, Polaris' top and bottom lines likely would have once again exceeded expectations.

As it stands, Polaris is still left with the enviable problem of production not being able to keep up with demand for its motorcycles.

Looking forward
Wine elaborated, "[W]e are confident in our plans to further increase our motorcycle throughput in the second half of the year, and as such, are maintaining and narrowing full-year guidance for sales and earnings per share."

Specifically, Polaris increased the lower end of its previous earnings guidance for 2015 by $0.10, resulting in a new full-year EPS guidance range of $7.32-$7.42. In addition, full-year 2015 revenue is now expected to grow 10%-12% over last year -- an increase on the lower end over its previous range of 9%-12% -- equivalent to to a range of $4.93 billion-$5.02 billion. Unfortunately, analysts' models were more optimistic, calling for full-year revenue of $5.03 billion, and earnings of $7.43 per share.

That certainly doesn't mean Polaris investors should be running for the hills. While today's pullback is unsurprising given Polaris' quarterly shortfall, its streak of outperformance -- at least relative to Wall Street's near-term demands -- had to end eventually. And again, its temporary inefficiencies in Q2 notwithstanding, Polaris continues to enjoy great strength and high demand for its products. Wine also reminded investors Polaris is set to introduce its model year 2016 powersports lineup at its dealer show next week, which should serve to only reinvigorate that demand going forward. In the end, contrary to what the market seems to be indicating today, it appears Polaris' business is stronger than ever.

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