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An Off-the-Beaten-Path Wide-Moat Idea

Temporary headwinds aside, Polaris is a standout among powersports companies, says Morningstar's Jaime Katz.


Jaime Katz: We believe the powersports companies on our coverage list, including Polaris (PII), Arctic Cat (ACAT), and BRP offer attractive margins of safety for long-term investors. Over the past 18 months, these companies have been under duress, owing to missteps in inventory management by certain participants and the uncontrollable effects of foreign-exchange headwinds. We view the newest risk factor, weak demand in key oil-producing regions, as a medium-term risk that could increase volatility materially for these businesses over the next one to three years in tandem with the recovery of futures prices. In our opinion, these temporary headwinds will eventually dissipate, and the North American players will be solidly positioned to at least maintain market share and improve current operating-margin levels.

Our long-term outlook still anticipates industry growth, but we forecast unit sales for traditional powersports business lines will rise more than 2% on average over the next five years with total dollar sales growing slightly higher as some price is taken--slower than the mid-single-digit pace they had grown over the prior five years. We believe there is an economic basis supporting this discretionary spend, with the wealth effect increasing consumers' willingness to purchase these high-ticket items. The U.S. consumer is still riding on rising housing prices, still-higher-than-previous equity prices in the broad stock market, and unemployment at healthy levels.

Jaime M. Katz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.