Can These ATV Manufacturers Charge Up Your Portfolio?
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Americans are spending time off-roading once again, as interest in outdoor sporting activities rises and discretionary income improves. Global industry sales of all-terrain vehicles (ATV) rose at a high single-digit rate in 2012, continuing its rebound off the sales declines caused by the financial crisis. More importantly, profits are rising sharply for the leading manufacturers, including Polaris Industries (NYSE: PII) and Arctic Cat (NASDAQ: ACAT). After sharp stock price gains over the past two years, do these companies still have gas left in their engines?
The leader
Polaris had a banner year in FY2012 as it registered higher sales across its diverse product portfolio, which includes ATVs, snowmobiles, off-highway recreational vehicles, and electric vehicles. For the year, it reported increases in revenues and operating income of 20.8% and 36.7%, respectively, versus the prior year. Despite some weakness in its European markets, the company’s international sales rose 9%, as the Asia-Pacific and Latin America regions generated double-digit sales gains.
Polaris’ operating margin improved in 2012, as its recent productivity initiatives have produced greater production efficiency. The company has also been successful at driving incremental sales in branded clothing and accessories, a segment that grew 13% during the period. The result has been strong operating cash flow, with $416 million in FY2012, which allowed the company to expand its manufacturing capacity around the world.
Looking ahead, Polaris is forecasting sales to rise at least 7% in 2013, with its operating profit expected to increase at twice that rate through further efficiency gains. The company is making a bold effort to gain a larger share of the growing motorcycle market, with its re-introduction of the Indian brand through a big, year-long marketing blitz. The motorcycle category was a key growth area for the company in 2012, with especially strong sales in international markets. Success in this segment should increase Polaris’ growth opportunities and help it to overcome any future weakness in its core ATV and snowmobile segments.
The challenger
Arctic Cat has similarly benefited from favorable industry trends in 2012, with strong sales of its ATV and off-highway vehicles. In the first nine months of FY2013, the company reported increases in revenues and operating income of 14.7% and 25.3%, respectively, compared to the prior-year period. While Arctic Cat hasn’t been as successful as Polaris in the sales of accessories, its focus on the domestic market led to a higher sales growth rate for its snowmobiles and vehicles.
The company’s operating margin improved in 2012, as product pricing increased and Arctic Cat leveraged its existing sales network. It also made the decision to move production of its snowmobile engines in-house, which should further enhance its profit margin in future years. Arctic Cat’s solid operating cash flow and financial position has also allowed it reduce its outstanding shares and improve shareholder value, including the purchase of a portion of Suzuki’s large minority stake in 2011.
A diversified play
Given the industry’s high product price points and exposure to discretionary income trends, investors might want to consider a more diversified investment choice. A good choice would be Cabela’s (NYSE: CAB), the world’s largest marketer of outdoor sporting merchandise and apparel, including all-terrain vehicles.
Founded in 1961, Cabela’s sells thousands of outdoor-inspired merchandise items through its 40 retail stores in the U.S. and Canada, as well 135 million catalogs that reached consumers in 175 countries. The company is also a large reseller of sporting and hunting firearms, a segment that has enjoyed strong sales over the past few years based on fears over tighter federal regulations. While the company’s big-box stores are primarily located in high-traffic tourist destinations, Cabela’s has been designing smaller, next-generation stores that can be supported by smaller communities.
In FY2012, the company produced solid financial results, with increases in revenues and operating income of 10.7% and 19.1%, respectively, versus the prior year. Cabela’s operating margin benefited from reduced markdowns on its merchandise, as well as a strong performance from its financial services division. The company has been an aggressive marketer of its proprietary credit and rewards program, with 1.5 million cardholders as of December 2012. Its rewards program encourages repeat customer business, accounting for 29% of merchandise sales in FY2012, ultimately enhancing Cabela’s profitability through lower marketing expenditures.
The bottom line
Shares of the ATV manufacturers have soared over the past two years, as consumers have returned to purchasing these high-price toys. While long-term growth opportunities are promising in international markets, economic pressures may create uneven sales growth for the industry over the short term. A wiser bet is likely the resellers of ATVs, like Cabela’s, that also have exposure to a wide range of outdoor sports and activities. It is one for the portfolio.
Robert Hanley owns shares of Polaris Industries and Cabela's. The Motley Fool recommends Polaris Industries. The Motley Fool owns shares of Arctic Cat. 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!
