Strong Pipeline Blazes Trail for ATV Maker Polaris
Product innovation and overseas expansion led us to raise the firm's economic moat rating to wide, says Morningstar's Jaime Katz.
For Polaris (PII), the past decade has been filled with new product launches, new category expansions, creative partner relationships, and stringent financial discipline. We don't expect any of these positive trends to stop or weaken, and we anticipate that the persistent spending on research and development and focus on delivering best-in-class product will help maintain Polaris' leadership position in powersports. This ability to consistently turn out preferred products at competitive prices, thanks to excellent manufacturing efficiencies, recently led us to raise our Morningstar Economic Moat Rating to wide from narrow. Polaris has delivered healthy returns on invested capital historically--an average of 41% over the past five years--which we believe will improve over the next decade; we forecast ROICs will rise to 45% over the next 10 years. We think the company's economic moat is predicated on its brand strength, but low-cost production supports and strengthens the moat. Having competitive manufacturing facilities in strategic locations gives the company the ability to remain an efficient and low-cost competitor. Despite its tremendous growth in recent years, we still see promise in periods ahead thanks to a strong product pipeline and acquisition potential.
We have long opined that Polaris' economic moat has been a function of its innovative and groundbreaking research, leading to best-in-class product offerings, and we have even greater conviction after viewing the 2015 model year lineup. Polaris routinely spends around 4% of its revenue base on research and development (about $140 million in 2013), versus 3% for Arctic Cat (ACAT) and 5% for BRP (DOO). Because of its scale, we think peers would have to invest at a much faster rate than Polaris to develop the same quantity of compelling products. Though we expect that some categories will start to become more saturated than in the past because of increased product selection by competitors (particularly in off-road, where peers continue to chase Polaris' best-in-class products and attempt to close the gap), Polaris continues to create new categories for itself by entering entirely new territories both organically and through acquisitions. Recent examples include the launch of the updated Indian brand and the introduction of the Slingshot product.
Jaime M. Katz, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.