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Stock Strategist

Wide-Moat Polaris Is Undervalued

It isn't all good news, but we think the benefits outweigh the risks.


Third-quarter performance was mixed at wide-moat  Polaris Industries (PII), with puts and takes across many of the company’s segments. For off-road, Polaris was able to stabilize market share, with side-by-side retail sales rising at a low-single-digit pace (in line with the industry) and all-terrain vehicles falling at a low-single-digit clip. Motorcycles saw the same lopsided performance, with Indian retail sales rising at a high-single-digit pace and Slingshot falling in the high 20s while the industry contracted in the low teens. Wholesale aftermarket sales rose 2%, a sequential improvement, but one that we expected to rise faster given Jeep product delays in recent quarters, which theoretically could have led to pent-up demand (however, units are finally shipping now). While the total top line grew 12%, helped largely by the Boat Holdings acquisition, the gross margin has struggled to stem declines, hindered by tariffs, rising logistics costs, and product mix shifts. We point to an important offset in our long-term thesis, which is that segments like boats may have weak gross margin profiles but excellent operating margin profiles, supporting the overall profitability of Polaris.

We don’t plan to materially alter our long-term outlook or our $118 fair value estimate for Polaris. Our forecast includes average sales increases of 6% and earnings per share growth of 19% over the next five years, including the 2018 acquisition of Boat Holdings, which should help bolster first-half 2019 growth materially. Trading at a 25% discount to our fair value estimate, the shares look attractive at current levels. Even though we are probably closer to a cyclical peak than in prior years, our long-term estimates incorporate normalized growth projections that adjust for this factor. Polaris remains a market leader with best-in-class innovation, an improving supply chain, and a solid manufacturing process, which should help keep its pricing power and brand intact.

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

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