Will the Stellar Performance of These Recreational Vehicle Companies Continue?

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Stock price movement of these three recreational vehicle companies showed a significant upswing of around 25% in last 12 months, due to both strong fundamentals, and revenue increases.

<img alt="" src="http://g.fool.com/editorial/images/61871/image-1jpg_large.png" />

Source: Yahoo! Finance

Moreover, with the increase in segment growth, customer preference, and new models, these companies will foster more growth in the upcoming year as well. Let's see why investors don’t want to miss out on these three recreational vehicle companies.

Promising order backlog with new plant

In the third quarter of 2013, Thor Industries (NYSE: THO) reported sales of $1.05 billion, up by 13% year-over-year. The recreational vehicle segment drove the increase in total sales. This segment rose 15% to $929.8 million in the third quarter, year-over-year. Thor's sales of motorized recreational vehicles grew 48% in the third quarter to $187.3 million, year-over-year. Furthermore, revenue from recreational vehicles will increase due to strong demand from younger families buying cost-effective recreational vehicles for outings and leisure activities. Thor also rolled out new products in the previous year, and it will halt discounts offered to customers. Stabilizing discounted prices will result in a profit margin increase of 1% in the next year. 

With the increase in sales of recreational vehicles, Thor bought the Wakarusa plant in Indiana previously operated by Navistar. Through this plant, the company will ensure future growth prospects and will expand production capacity. The plant covers 1.2 million square feet, and the total production area is around one million square feet. This plant has area of 235,000 square feet to facilitate painting of recreational vehicles with 37 paint booths. Thor was outsourcing the painting process at a significantly higher cost of $6,000 per unit. Now, the company will reduce its painting cost by $1,000 per recreational vehicle unit. Thor will begin plant operations this year, which will result in lower costs. Significant cost improvement will increase the profitability of the company.

Blockbuster motorcycle

In the first quarter of 2013, Polaris (NYSE: PII) posted sales growth of 11% to $746 million, year-over-year. Its new products, the Ranger 900 XP and RZR Jagged X launched last year, drove this growth. Polaris acquired Indian Motorcycle Company in 2011 and has been focusing on re-launching the Indian brand. The company will compete in the 1400cc heavyweight motorcycle segment, which has a global addressable market of around 214,000 units. However, it had less than 0.5% global market share in this segment, or just 428 units, last year. The company is planning to increase Indian’s dealer base from 20 last year to around 125-140 this year.

With the improved dealer base, it expects to capture significant global market share in the heavyweight motorcycle segment. Polaris' Indian motorcycle is expected to achieve sales of around 6,745 units in 2014, a massive expansion from 428 units last year. The company will compete with Harley-Davidson (NYSE: HOG) in this product segment. Moreover, an expected revenue figure from Indian is as below:

<table> <thead></thead> <thead> <tr><th> <p><strong>Year</strong></p> </th><th> <p><strong>Expected total revenue from Indian motorcycle</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p>2013</p> </td> <td> <p>$57 million</p> </td> </tr> <tr> <td> <p>2014</p> </td> <td> <p>$122 million</p> </td> </tr> <tr> <td> <p>2015</p> </td> <td> <p>$223 million</p> </td> </tr> <tr> <td> <p>2016</p> </td> <td> <p>$329 million</p> </td> </tr> <tr> <td> <p>2017</p> </td> <td> <p>$398 million</p> </td> </tr> </tbody> </table>

The company will compete with Harley-Davidson in this product segment. Harley-Davidson dominates the U.S. heavyweight motorcycle market with 57% market share, while its other competitors have market share under 10% individually. Polaris is known for its snowmobiles and all-terrain vehicles, but with the re-launch of Indian motorcycle, the company is betting to gain market share in the heavyweight motorcycle segment. Due to Harley-Davidson’s dominant market position and its strong brand affinity, it is expected that Indian motorcycles won't take away from Harley-Davidson's market share. Moreover, the U.S. heavyweight motorcycle market is expected to increase from 293,000 units last year to 343,000 by 2017. With the expanding market, there is enough space for both the companies to grow.

Strong sales fosters the growth

Customers purchasing motorcycles from Harley-Davidson tend to customize their purchase to achieve a unique look. The company's parts and accessories segment caters to customers. In addition, these customers often purchase general merchandise, which includes motorcycle apparel, t-shirts, leather products, and toys. Sales of parts and accessories largely depend on the motorcycle sales and cross-selling. To increase the sales of Harley-Davidson motorcycles, the company is executing a strategy to transform its motorcycles from traditional to sporty.

The company generated 11.8% of total revenue last year from its operations in Europe. It will launch its VRSC line of cruiser motorcycles to attract the younger generation. VRSC bikes are trendy, sporty, and distinctly different from traditional Harley-Davidson bikes. These motorcycles will have the latest technology, including a water-cooled engine, which was designed with the help of Porsche. Due to this launch, the company’s market share in Europe is expected to increase from 15.9% last year to 16.2% in the current fiscal year.

Conclusion:

All three recreational manufacturing companies have the potential to grow in the future, due to strong sales, new technology, the latest acquisitions, and re-launching of product.

Harley-Davidson will benefit due to surging demand for motorcycles, which will increase parts, accessories, and merchandise segment revenue. In addition, the launch of VRSC motorcycles will increase Harley’s market share in Europe. Meanwhile, Thor's rising sales of recreational vehicles, and its new plant will result in growing revenue. With the re-launching of the Indian motorcycle brand, Polaris's revenue will increase by leaps and bounds. I recommend a buy for all three stocks.

 

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Madhukar Dubey has no position in any stocks mentioned. The Motley Fool recommends Polaris Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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