dutch

Summary

  • Polaris has a number of strong brands that have been growing well for several years.
  • Their growth has been hurt by several recalls this year, combined with a weak industry environment.
  • Polaris is undervalued if they are able to execute their strategies in the medium-term.

 

Article

Polaris (NYSE[tongue]II) has been on a steep decline for quite some time. After reaching all-time highs in the high $150's in early 2015, their shares trade hands today around $76. They have many strong brands, including the reincarnation of the Indian motorcycle, which has been taking market share from key rival Harley Davidson (NYSE:HOG) consistently. However, several factors have contributed to weakness in overall results for the company, which may present an opportunity for the patient investor.

Fire hazards in the RZR and Ranger ROV units led management to issue recalls for both, the second recall of RZR units this year. Recalls are a part of business, but they have been especially painful for Polaris in 2016. The base warranty and legal costs for the recall activity totaled $65M, taking over a 50% chunk out of the company's net income for the quarter. This doesn't include lost business due to delayed launches of new models while verifying their integrity, or margin hits due to increased promotional activity. Recall activity is expected to be mostly complete by year-end, at which point Polaris will get to work on repairing its image and restoring lost profitability.

(Continue Reading Here)

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V-Twin
You have to sign up to them to read page 2...    [rolleyes]

Why don't you tell us what the article said and why you are concerned Dutch.
Let's be kind to one another.
Melbourne, Victoria
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dutch
mmm that's weird because I just opened it on my phone and the only way to post it on the forum is that I have to email it first to my email anyway they have a whole lot of trouble with recalls its got to do with fires ect over the past 3 years of the car side of Polaris  and the Polaris shares are  down so hopefully they get this fixed
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BigTone

Here is the whole article...

Summary

Polaris has a number of strong brands that have been growing well for several years.

Their growth has been hurt by several recalls this year, combined with a weak industry environment.

Polaris is undervalued if they are able to execute their strategies in the medium-term.

[42116756-14784424031287887]

Polaris (NYSE:PII) has been on a steep decline for quite some time. After reaching all-time highs in the high $150's in early 2015, their shares trade hands today around $76. They have many strong brands, including the reincarnation of the Indian motorcycle, which has been taking market share from key rival Harley Davidson (NYSE:HOG) consistently. However, several factors have contributed to weakness in overall results for the company, which may present an opportunity for the patient investor.

[42116756-14784423827019181]

Fire hazards in the RZR and Ranger ROV units led management to issue recalls for both, the second recall of RZR units this year. Recalls are a part of business, but they have been especially painful for Polaris in 2016. The base warranty and legal costs for the recall activity totaled $65M, taking over a 50% chunk out of the company's net income for the quarter. This doesn't include lost business due to delayed launches of new models while verifying their integrity, or margin hits due to increased promotional activity. Recall activity is expected to be mostly complete by year-end, at which point Polaris will get to work on repairing its image and restoring lost profitability.

 

The overall industry was down high-single digits, which combined with recalls and lost shipments led to Q3 sales plummeting 19% YOY. These sales numbers have led to a narrowing of full year 2016 EPS guidance of $3.40 -$3.60, which represents a 41% decline YOY. The average selling prices of their ORV's was down around 8% for the quarter, due to increases in promotional activity. This was management's response to the recalls, which sacrificed margins to attempt to maintain market share through this tough time. Polaris remains the leader, but has likely lost share regardless of promotional activity. The hope, going forward, is that Polaris will have done enough work and research into the issues they have been having to have fully fixed the problem. Scott Wine, Polaris CEO, addressed these changes in their earnings call:

But what we've done is gone through an extensive - I mean, extensive effort to understand any thermal risks on our RZRs and other vehicles. And part of the issue, the reason we didn't see it in 2013 and 2014 is that we didn't have the processes and tools to get the information from the field as quickly as we could and manage the information flow. And ultimately, it took us a while to recognize the trends. And ultimately, these are very complex issues. I mean, we have had some of the best engineering experts in the industry, including the automotive industry to help us review these situations. In some cases, it will take us many months to ultimately define the root cause and we went as aggressively as we could once we understood the risks, and it just took us a while to figure it out. As I said in my remarks, we've embodied all of that knowledge now into both our processes and our products going forward and we feel extremely confident in our ability to manage the thing, the thermal risks of our vehicles going forward.

With the numbers presented above, it's hard to find many bright spots. However, there are a few. Polaris still managed to take market share in their motorcycle segment. Their motorcycles continue to outperform the overall industry, which likely means they are taking share from Harley-Davidson. Overall revenue actually declined 3% YOY, but this is only due to the Slingshot backlog of orders being pushed to market in Q3 2015 for its new launch. This continued strength in the motorcycle segment should help them weather the difficult times they are facing in ORV's in the near-term.

 

[42116756-14784425807606192]

Source: Investor Presentation

The recent acquisition of Transamerican Auto Parts will expand Polaris' footprint in the PG&A category. This will lead to creating a new reporting segment starting next year combining Transamerican with their existing PG&A sales. The acquisition will likely close in the fourth quarter, as early as this month. Earnings will be accretive in the range of $0.25 to $0.30, likely starting next year.

Transamerican will be adding 75 retail stores, 6 distribution centers, and ~1700 employees to the Polaris team, and should represent relatively low integration risks. However, the timing of this acquisition seems very strange. Although the pains Polaris is going through haven't made them unprofitable, it doesn't seem like they are in a place to be looking at acquisitions. However, I suppose that this show management's conviction that earnings will turn around soon. If they saw an opportunity in Transamerican, then I applaud their boldness in pushing ahead with the acquisition. This is something that investors will be able to know much better with hindsight, likely with a year of earnings under its belt at the end of 2017.

That being said, Transamerican has grown its sales by 15% in the last 3 years, and their combination with Polaris should leverage an extended distribution network to improve that growth. I would expect that Polaris will see a solid bump in their PG&A from pushing products into the Transamerican retail outlets, as well.

[42116756-14784424718880022]

 

Polaris is a dividend contender, having hiked it every year for the last 21 years. I don't see the recent issues causing them to break that streak by freezing or cutting their dividend. Even with earnings at their likely bottom this year at the low range of $3.40, their payout ratio is still only 64.7%. This will obviously go down significantly if their earnings recover to levels seen even last year. Their debt is at a manageable level, even after their acquisition of Transamerican. Overall, Polaris is not in any significant financial hardship and their cash flows remain healthy.

[42116756-1478443309698106]

Source: Investor Presentation

[42116756-14784425166037292]

Source: FAST Graphs

If earnings were not likely to recover, Polaris would be overvalued today. However, some of the recovery expected next year is already reflected in the stock price, since it is trading today for a P/E multiple of ~21-22X expected full-year 2016 earnings. However, 2015 peak earnings were about double that, which would lead to a close to 11X P/E. If Polaris is able to recover within a year or 2 to their EPS number last year (which had its own difficulties due to a warm winter), then I believe the company is trading cheaply today. There are several things that would have to happen in order for that to occur, with alot of the onus resting on management. Recovery of the RZR brand, integration of the Transamerican acquisition, and the continued push of Indian to take market share are all key drivers of Polaris profitability going forward.

 

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Financial statistics were sourced from Morningstar, with the charts and tables created by the author, unless otherwise stated. This article is for informational purposes only and represents the author's own opinions. It is not a formal recommendation to buy or sell any stock. Please do your own due diligence and/or consult a financial professional prior to making investment decisions.

Disclosure: I am/we are long PII.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Cheers,
Tony
St. Kilda  Victoria
IMRG: 20380071
Current Ride: 2020 Dark Horse Challenger 
Previous Ride: 2015 Roadmaster
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faceonahead
maybe we buy up, become substantial shareholders as a group and tell them to fix their quality and improve their dealer network or we sell our shares at fire sale rates and tank their business [smile]
2020 Challenger Dark Horse, stage 1 pipes and air and a stack of minor mostly cosmetic mods
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V-Twin
faceonahead wrote:
maybe we buy up, become substantial shareholders as a group and tell them to fix their quality and improve their dealer network or we sell our shares at fire sale rates and tank their business [smile]
Awesome!  +1.

...only question I have is where do we get a spare billion dollars???    [biggrin]
Let's be kind to one another.
Melbourne, Victoria
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faceonahead
V-Twin wrote:
Awesome!  +1.

...only question I have is where do we get a spare billion dollars???    [biggrin]
Trump might be up for it, if I help build him a wall
2020 Challenger Dark Horse, stage 1 pipes and air and a stack of minor mostly cosmetic mods
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V-Twin
faceonahead wrote:
Trump might be up for it, if I help build him a wall
Just watched his Victory Speech... at least that was written by a speech writer so nothing crazy was said.  Only time will tell what Trump's USA looks like.
Let's be kind to one another.
Melbourne, Victoria
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Hunter
V-Twin wrote:
Only time will tell what Trump's USA looks like.


Yeah... That trip to Australia is looking better and better every day. :/
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V-Twin
Hunter wrote:
Yeah... That trip to Australia is looking better and better every day. :/
That's funny because I was thinking about viditing the west coast late next year for 3 weeks touring... I might wait until 'changing of the guard' and see how crazy things get first.   [biggrin]
Let's be kind to one another.
Melbourne, Victoria
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Houso Joel
V-Twin wrote:
That's funny because I was thinking about viditing the west coast late next year for 3 weeks touring... I might wait until 'changing of the guard' and see how crazy things get first.   [biggrin]


It'll be fine [biggrin] - the media reporting we are seeing is pretty left leaning - I follow news sites over there and this is all being blown out of porportion...
I hope I know who you'll be calling for a quote on that trip [wink]
Houso Joel
SYDNEY NORTH
Harley Davidson Traitor [wink]
Started with an Indian - stayed for the conversation
2017 HD Road King Black(Anita)
Previous 2015 Scout Red (Geena)
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crash
Funny, I was talking to a group of American vendors today about the trump victory.  It was interesting what they were saying about the media and what we hear here.  They seemed to indicate that what we have heard is pretty much how it occurred and we were hearing the same stuff as they were.  Must admit, they were from Chicago so I believe that that is a "Clinton" camp so they had pretty long faces.
I must admit, I am not so concerned about trump being in, I am more concerned about other countries and their perception of trump being in.  This could highten the anxiety that is already at breaking point in the middle east (for example) - the knee jerk reaction if you will.  That, to me, is the most scary - what he does in the boundary's of his own country is his business but what happens outside is everyones business.
Ulysses #30673
IMRG #AU100394
Current: RoadMaster (ebony and ivory)
Highett Victoria Australia
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Houso Joel
Yeah doing the facebook "profiling" of my friends in Arizona, Florida, Minnesota, Colorado, Mississippi & Virginia and they are ecstatic (not bad for a bunch of college educated men and women including minorities lol) How it went down is how it went down but the degree of angst is somewhat being blown out of porportion with what I have read and seen in their local media. Guess it just sells stories better lol
Houso Joel
SYDNEY NORTH
Harley Davidson Traitor [wink]
Started with an Indian - stayed for the conversation
2017 HD Road King Black(Anita)
Previous 2015 Scout Red (Geena)
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V-Twin
Houso Joel wrote:
I hope I know who you'll be calling for a quote on that trip [wink]
The thing is, we don't normally book anything in Australia.  I was hoping to do the same.  Just book the flights and bike remtal and see which way the wind blows and go!  It is a holiday after all, don't want to wake up one morning and feeling tired and have to do xxxkms that day.  I would call the reception and say we are staying another night.  That freedom appeals to me.  Of course, if we are traveling during peak time, we might not have a place to stay!  [biggrin]

I'm happy to do tours when I don't have my wife with me as travelling by myself wouldn't be too enjoyable.
Let's be kind to one another.
Melbourne, Victoria
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Houso Joel
V-Twin wrote:
The thing is, we don't normally book anything in Australia.  I was hoping to do the same.  Just book the flights and bike remtal and see which way the wind blows and go!  It is a holiday after all, don't want to wake up one morning and feeling tired and have to do xxxkms that day.  I would call the reception and say we are staying another night.  That freedom appeals to me.  Of course, if we are traveling during peak time, we might not have a place to stay!  [biggrin]

I'm happy to do tours when I don't have my wife with me as travelling by myself wouldn't be too enjoyable.


Can't argue with that now can we? [wink]

Houso Joel
SYDNEY NORTH
Harley Davidson Traitor [wink]
Started with an Indian - stayed for the conversation
2017 HD Road King Black(Anita)
Previous 2015 Scout Red (Geena)
Quote 0 0