Polaris Earnings: Retail Demand Solid for On-Road and Off-Road Products, Supporting Share Gains

We don’t expect any material change to our $175 fair value estimate for wide-moat Polaris PII, despite the firm’s raised sales outlook to 3%-6% growth (from a 3% decline to 3% increase prior), which is in line with our pre-print 4% projection. But we plan to lift our $10.17 EPS outlook for 2023 modestly, given that Polaris hiked the low end of its $10.10-$10.75 prior guidance to $10.20, while holding our longer-term assumptions intact. With 3% average sales growth and an operating margin that rises to 12% in our outlook over the next decade, we still view shares as attractive.

In our opinion, second-quarter results indicate Polaris is on track with innovation as indicated by share gains in on-road, off-road, and marine segments, after an inconsistent stretch of market share results attributable to a shifting supply chain environment. As evidence, Polaris saw North American retail sales of 14% in off-road, ahead of high-single-digit industry growth, and more than 40% retail growth in Indian against a low-single-digit growth market. And although pontoon demand contracted (as in most of the marine business), Bennington was still able to take share.

Additionally, second-quarter performance tracked near expectations, with $2.2 billion in sales matching our outlook, and $2.42 in adjusted EPS besting our estimate by just $0.05. During the period, on-road was the outperformer, with sales up 21% while marine sales struggled, declining 18% (with further deceleration now anticipated over the remainder of 2023). That said, profitability held up well despite higher financing costs and unfavorable foreign exchange, with the EBITDA margin contracting just 40 basis points (to 12%, around 2019′s level). We think this is partially due to pricing gains that continue to hold up, benefiting from Polaris’ focus on high end products, which should keep Polaris on track for gross margin gains in 2023, despite a 20-basis point contraction in the second quarter (to 22.8%).