A High-Quality Name in Powersports

Jaime M. Katz: Polaris continues to innovate into key categories catering to its slowing end user markets, while expanding into adjacent markets through acquisitions in order to boost its brand relevance. These factors helped the company post second-quarter results that included 18% sales growth and a mere 2% earnings per share decline, even though the company was significantly impacted by higher tariff costs. While the company lost share at retail overall during the second quarter, with Polaris retail sales falling 2% in an industry that was modestly positive, this was largely due to Polaris' unwillingness to participate in unnecessary price competition, and we saw the firm take 9% average selling price increases in the key ORV segment. In our opinion, this implies the brand continues to carry weight with consumers, a key factor underlying our wide-moat rating.

We still believe Polaris remains better positioned than many of its powersports peers, thanks to many of its smaller acquisitions over the last decade outside of its legacy businesses, which had helped stabilize the overall revenue base. And while digesting sizable businesses like Transamerican Auto Parts and Boat Holdings over the past few years pushed Polaris back into the discretionary spending camp, they also helped provide a growth hedge against slower-growing categories like motorcycles and snowmobiles, bolstering top-line performance and providing further category diversification. At this time, we view shares as undervalued versus our $105 fair value estimate but believe further rhetoric on tariffs could send shares lower, making ownership in shares even more attractive to investors.