Polaris Industries (PII) has changed materially over the past decade, moving from a traditional discretionary spending business to a more diversified industrial conglomerate. Despite operating through a massive economic recession, the company was still able to generate average adjusted returns on invested capital, including goodwill, in excess of 50% in the current decade. This was thanks to its best-in-class innovation and production, which stimulated demand and allowed the company to maintain a market-leading position in many of its product categories. Exiting the downturn, Polaris had some of the best ROICs on our coverage list, averaging 33% including goodwill over the past five years, and it continues to produce robust results well exceeding our 8% weighted average cost of capital estimate. This reinforces our wide economic moat rating, supported by Polaris’ brand intangible asset and cost advantage.
While extremely healthy, Polaris’ ROICs have ticked down materially from levels earlier in the decade. We think this is primarily a function of two factors. First, the company has continued to bolt on a number of disparate businesses that initially come with less efficient operating models, which drag on returns on invested capital. Second, the company has more invested capital in the business than in the past (with a higher denominator in the equation leading to lower calculated returns), as it has funded its last two transactions with debt, making the return profile look less robust. That said, our ROIC forecast, including goodwill, still reaches 22% in 2023 versus a peak of more than 100% in 2011-12 and a trough of 16% in 2016.
Jaime M. Katz, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.