- Polaris performs better than competitors during difficult times.
- Polaris’ Indian Motorcycle brand represents a serious contender for Harley Davidson.
- Polaris, unlike Artic Cat, isn’t hampered by major product recalls.
- Polaris stock isn't cheap when compared to Harley Davidson, but both trade at a discount to the S&P 500.
There are three types of companies: those that sell needed products such as railroad transportation, those that sell highly wanted recreational products such as toys and those that sell a combination of needed and wanted products. Polaris Industries (NYSE:PII), which makes ATVs, snowmobiles, small vehicles, side-by-side vehicles and motorcycles, definitely qualifies as a recreational company. However, this company sets itself apart from its competitors. Here’s why.
Good financial management
Recreational oriented companies typically perform relatively poorly during times of recession as consumers prioritize their use of scarce dollars for basic necessities. Polaris is no exception. However, sometimes success can be a relative thing. Due to its financial prudence, Polaris never turned a net loss (see chart below) nor was it free cash flow negative during the last recession, which occurred between 2007 and 2009.
Polaris’ competitors didn’t fare nearly as well. The company’s most direct publicly traded competitor, Arctic Cat (NASDAQ:ACAT), turned net losses during the last recession (see chart below) and was free cash flow negative in 2011. Arctic Cat has also struggled during relatively good times due to a product recall that it had in the fall of 2014. Product recalls can damage brands by leaving a negative perception in the minds consumers.
Source: Arctic Cat net income data by amigobulls.com
Even motorcycle juggernaut Harley Davidson (NYSE:HOG), which competes directly with Polaris’ motorcycle unit, turned a net loss during the recession (see chart below) and registered a free cash flow deficit in 2008.
Source: Harley Davidson Net Income Chart by amigobulls.com
Strong motorcycle brand
Another thing going for Polaris is the Indian Motorcycle brand. Polaris purchased Indian Motorcycle from a private equity firm in 2011. The Indian Motorcycle brand possesses a history dating as far back as Harley Davidson and Polaris can leverage its nostalgic factor to expand its motorcycle business.
The Indian brand has served as a healthy contributor to Polaris’ top line expansion since 2011. Polaris’ motorcycle sales increased 160% from 2011 to 2014. So far this year, Polaris’ motorcycle sales remain robust with its motorcycle sales increasing 65% year-over-year.
Motorcycles now represent 14% of Polaris’ overall sales versus 5% in 2011. Of course, Polaris’ $349 million in 2014 motorcycle sales represent a far cry from the $6.2 billion in revenue that Harley Davidson registered last year. However, Polaris can grow into a serious contender for Harley Davidson if Polaris can keep expanding its motorcycle segment at a healthy clip.
The downside for Polaris stock investors
Harley Davidson holds some advantages over Polaris. First, Harley Davidson focuses on motorcycles, financing those motorcycles and related merchandise. This allows Harley Davidson’s management to get better and better at making and selling motorcycles. Polaris’ management needs to worry about product lines such as ATVs and snowmobiles. Of course, you could argue that multiple product lines can provide diversity for Polaris and its shareholders. In other words, if one product line goes sour it can fall back on others. Most of Harley Davidson’s fortune comes from one major product - motorcycles.
Also, Harley Davidson’s stock comes at a lower valuation than Polaris. Harley Davidson currently trades at a P/E ratio of 15 versus 17 for Polaris. However, both companies trade lower than Arctic Cat’s P/E ratio of 995, which stems from Arctic Cat’s struggles with the product recall. The valuation of both Harley Davidson and Polaris reside below the S&P 500 P/E ratio of 20.
Polaris’ capable financial management during difficult times makes this company an attractive investment option in comarison to its competitors. Moreover, Polaris’ knack for innovation will keep the final consumer interested in purchasing its products. For example, Polaris just recently introduced six interesting looking new Indian Motorcycles for 2016. Polaris may also be able to pick up market share from Arctic Cat, which has faced brand struggles stemming from its product recall. Polaris stock definitely deserves a spot in your portfolio.