Company Reports

Polaris is one of the longest-operating brands in powersports. We believe that its brands, innovative products, and lean manufacturing yield the firm a wide economic moat and that it stands to capitalize on its research and development, solid quality, operational excellence, and acquisition strategy. However, Polaris' brands do not benefit from switching costs, and with peers innovating more quickly than in the past, it could jeopardize the firm's ability to take price and share consistently, particularly in periods of inflated recalls or aggressive industry discounting.

Wide-moat Polaris is tactically managing shipments in 2024 because the big-ticket discretionary-goods consumer is remaining cautious, partly because of high financing rates. As a result, Polaris delivered first-quarter sales declines of 16% in off-road, 14% in on-road, and 53% in marine, as the firm tries to optimize dealer inventory levels proactively. The total decline in sales (20%) was not only affected by lower unit shipments, but also by lower pricing, as promotional cadence has been elevated in recent quarters. The impact from lower absorption was significant, leading to the lowest first-quarter adjusted operating margin since the onset of the pandemic (3% including financial services). That said, we commend Polaris for acting strategically, pruning unit shipments to protect inventory from persistent promotions if demand fails to pick up over the remainder of the year. If we hinge the return of demand on falling interest rates, we could have to wait until fall to see retail sales pick up in earnest.

Polaris is one of the longest-operating brands in powersports. We believe that its brands, innovative products, and lean manufacturing yield the firm a wide economic moat and that it stands to capitalize on its research and development, solid quality, operational excellence, and acquisition strategy. However, Polaris' brands do not benefit from switching costs, and with peers innovating more quickly than in the past, it could jeopardize the firm's ability to take price and share consistently, particularly in periods of inflated recalls or aggressive industry discounting.

Wide-moat Polaris delivered disappointing fourth-quarter results and a weak 2024 outlook, plagued by slowing industrywide demand and consumer fatigue from higher interest rates. In the period, total sales fell 5% (retail sales down 7%) and profits declined as consumers sought promotional offers and dealers managed floorplan financing costs. This led to significant adjusted gross margin pressure, down nearly 300 basis points, and the deleverage of operating expenses, which resulted in operating margin compression of 400 basis points (to 7%, including financial services income). One positive of the quarter was in off road vehicles, which displayed market share gains helped by the firm’s high exposure to the resilient utility vehicle segment.

Polaris is one of the longest-operating brands in powersports. We believe that its brands, innovative products, and lean manufacturing yield the firm a wide economic moat and that it stands to capitalize on its research and development, solid quality, operational excellence, and acquisition strategy. However, Polaris' brands do not benefit from switching costs, and with peers innovating more quickly than in the past, it could jeopardize the firm's ability to take price and share consistently, particularly in periods of inflated recalls or aggressive industry discounting.

Notable concerns in wide-moat Polaris’ third quarter print that displayed higher costs and a hesitant consumer sent shares down a single-digit clip. The firm saw higher manufacturing costs, increasing floorplan financing expenses, rising promotions, and mix eating into the enterprise level gross margin, which fell 130 basis points to 22.6%. The lack of volume leverage, with total sales falling 4%, but lower by 19% in on-road and 48% in marine, crushed operating income, down nearly 20% despite a 70% jump in financial services income. We plan to lower our $171 fair value estimate by a mid-single-digit clip due to two main changes. First, we are reducing our gross margin forecast for 2023-24 (60 basis points in 2023, 20 in 2024) given the longer duration to convert sales at dealers, which will keep both floorplan financing costs and promotions higher. Second, we will lower our 2024 sales growth (to flat from 3%) as we don’t expect the macroeconomic environment to turn positive over the next few months. That said, we view shares as attractive thanks to a wide margin of safety.

Polaris is one of the longest-operating brands in powersports. We believe that its brands, innovative products, and lean manufacturing yield the firm a wide economic moat and that it stands to capitalize on its research and development, solid quality, operational excellence, and acquisition strategy. However, Polaris' brands do not benefit from switching costs, and with peers innovating more quickly than in the past, it could jeopardize the firm's ability to take price and share consistently, particularly in periods of inflated recalls or aggressive industry discounting.

We don't expect any material change to our $175 fair value estimate for wide-moat Polaris, despite the firm's raised sales outlook to 3%-6% growth (from a 3% decline to 3% increase prior), which is in line with our pre-print 4% projection. But we plan to lift our $10.17 EPS outlook for 2023 modestly, given that Polaris hiked the low end of its $10.10-$10.75 prior guidance to $10.20, while holding our longer-term assumptions intact. With 3% average sales growth and an operating margin that rises to 12% in our outlook over the next decade, we still view shares as attractive.

Polaris is one of the longest-operating brands in powersports. We believe that its brands, innovative products, and lean manufacturing yield the firm a wide economic moat and that it stands to capitalize on its research and development, solid quality, operational excellence, and acquisition strategy. However, Polaris' brands do not benefit from switching costs, and with peers innovating more quickly than in the past, it could jeopardize the firm's ability to take price and share consistently, particularly in periods of inflated recalls or aggressive industry discounting.

We don’t plan any material change to our $175 fair value estimate for wide-moat Polaris after incorporating stellar first-quarter results. As supply chain constraints have eased, Polaris has been able to resume a normal shipping cadence, resulting in a nearly eliminated backlog at its dealer network. More importantly, this availability of product has led to the return of market share gains for Polaris, with retail sales in all its three segments growing faster than the market. Notably, retail sales of ORV contracted 10% and motorcycle retail sales were flat, but their respective industries fell faster, at a low-double-digit clip. Polaris delivered 22% sales growth, to $1.6 billion (well ahead of our 5% growth estimate), with off-road sales rising 19%, on-road up 42%, and marine higher by 42%. This supported both gross and EBITDA margins expansion of around 170 basis points (to 21.5% and 10.9%, respectively), thanks primarily to price and mix, despite a tick up in the promotional environment.

Polaris is one of the longest-operating brands in powersports. We believe that its brands, innovative products, and lean manufacturing yield the firm a wide economic moat and that it stands to capitalize on its research and development, solid quality, operational excellence, and acquisition strategy. However, Polaris' brands do not benefit from switching costs, and with peers innovating more quickly than in the past, it could jeopardize the firm's ability to take price and share consistently, particularly in periods of inflated recalls or aggressive industry discounting.

We don’t plan any material change to our $175 fair value estimate for wide-moat Polaris after incorporating recent results into our model. We view the shares as attractive. Fourth-quarter sales of $2.4 billion (up 21%) edged our $2.3 billion forecast, with all segments delivering strong growth. Off-road sales jumped 19%, while on-road rose 29% and marine 36%, bolstered by price and mix from inventory restocking. Polaris did cede some share in the quarter; retail sales declined at a mid-single-digit rate, worse than the industry’s low-single-digit downtick, hindered by weakness in the off-road and marine segments. Polaris called out soft recreational demand (utility is holding up) at retail, which we don’t find surprising, given the macro environment, but it also suffered from recalls that limited throughput to the dealer network. Still, EBITDA margin expanded 270 basis points to 14%, thanks to a gross margin that widened 360 basis points to 23.8%, benefiting from price and volume (shipments) that more than offset higher operating expenses attributable to marketing and corporate costs.

Polaris is one of the longest-operating brands in powersports. We believe that its brands, innovative products, and lean manufacturing yield the firm a wide economic moat and that it stands to capitalize on its research and development, solid quality, operational excellence, and acquisition strategy. However, Polaris' brands do not benefit from switching costs, and with peers innovating more quickly than in the past, it could jeopardize the firm's ability to take price and share consistently, particularly in periods of inflated recalls or aggressive industry discounting.

We don’t plan any material change to our $175 fair value estimate for wide-moat Polaris after digesting its third-quarter financials and view share as undervalued. Third-quarter sales rose 32%, to $2.3 billion, modestly ahead of our $2.2 billion forecast, with off-road rising 33%, on road higher by 30%, and marine up 42%. Even better, Polaris was able to produce solid profitability, with gross margin in off road expanding 340 basis points and on road up 293 basis points (in line with our estimates), thanks to pricing and mix. Also, marketing and selling expenses were controlled, at 5% of sales (down from 7% the past two years), with promotions limited by constrained volumes at retail. The ability to improve operating margin (to 10.4% ex financial services, up 240 basis points) in an uncertain consumer environment offers us confidence that Polaris should be able to capture further gross margin upside as transportation and input costs normalize over the next year, even if promotional cadence begins to rise.

Polaris is one of the longest-operating brands in powersports. We believe that its brands, innovative products, and lean manufacturing yield the firm a wide economic moat and that it stands to capitalize on its research and development, solid quality, operational excellence, and acquisition strategy. However, Polaris' brands do not benefit from switching costs, and with peers innovating more quickly than in the past, it could jeopardize the firm's ability to take price and share consistently, particularly in periods of inflated recalls or aggressive industry discounting.

Supply chain congestion remains the key issue keeping wide-moat Polaris from achieving normalized throughput, although it appears the acquisition of inputs is beginning to ease. A modestly improving logistics situation allowed the firm to ship 10,000 more off road units than in its first quarter. Despite some progress, second-quarter retail sales were depressed, down 23%, and the firm saw market share declines across its ORV, off road, and marine segments, which we believe stems from the dysfunctional supply chain. We expect market share losses to reverse as parts availability improves over the next year, supporting our hypothesis that Polaris will continue to carry a top-notch brand intangible asset.

Polaris is one of the longest-operating brands in powersports. We believe that its brands, innovative products, and lean manufacturing yield the firm a wide economic moat and that it stands to capitalize on its research and development, solid quality, operational excellence, and acquisition strategy. However, Polaris' brands do not benefit from switching costs, and with peers innovating more quickly than in the past, it could jeopardize the firm's ability to take price and share consistently, particularly in periods of inflated recalls or aggressive industry discounting.

After nearly six years of ownership, Polaris is set to prune the Transamerican Auto Parts, or TAP, line, divesting all brands, operations, distribution facilities, and 4 Wheel Parts locations. In 2021, the TAP business represented around $760 million in sales (9% of total), which was relatively flat with the $740 million in trailing 12-month sales at the time of its tie-up (2016). We don’t believe this departure will have any impact on the Polaris brand or its wide moat rating and could see profit margins tip up after the sale. For one, the aftermarket segment gross margin profile generally trailed the ORV/snowmobile segment (63% of 2021 sales), and with 2% average sales growth over the last five fiscal years, we surmise there was little, if any, operating expense leverage stemming from TAP. Over the past year, Polaris has been surgically removing lower-performing businesses, also releasing the GEM and Taylor Dunn brands in 2021, which should prove beneficial to ROIC metrics.

Polaris is one of the longest-operating brands in powersports. We believe that its brands, innovative products, and lean manufacturing yield the firm a wide economic moat and that it stands to capitalize on its research and development, solid quality, operational excellence, and acquisition strategy. However, Polaris' brands do not benefit from switching costs, and with peers innovating more quickly than in the past, it could jeopardize the firm's ability to take price and share consistently, particularly in periods of inflated recalls or aggressive industry discounting.

We don’t plan any material change to our $184 fair value estimate for wide-moat Polaris after assessing first-quarter results, despite ongoing supply chain uncertainty. While sales fared well despite constrained throughput (flat, at $1.96 billion), profitability was hindered by inflation and supply chain issues, driving 450 basis points in adjusted gross margin pressure (20%). We view such headwinds as transitory, and as such, we expect the cost structure to normalize over time—likely an outcome that won’t occur until 2023. In our view, the largest risk to 2022 remains the firm’s ability to control gross margin pressure to just 100-120 basis points, which implies expansion in the back half, something we have only modest confidence in given the still strangled supply chain (around 50 suppliers had shortages that impacted more than 100 units, up relative to the prior two quarters). The biggest disappointment in the period surrounded market share, with Polaris ceding share in every segment. The firm alluded to its inability to complete units, delaying shipments, which we plan to watch for remediation over the back half of 2022.