Getting Investment Ideas From Recreational Vehicles

William is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Sometimes you can find investment ideas by simply looking at what you or your neighbors use as recreational vehicles. Of course you need to research to find out whether the companies that make these vehicles generate cash for their owners or shareholders. You may enjoy a leisurely ride on an ATV or motorcycle. A recovering economy served as a catalyst for better fundamentals in the recreational vehicle industry. The three companies presented below sell these vehicles of fun and may prove worthy of your research attention.

Mini vehicles of every kind

Polaris (NYSE: PII) makes various small recreational vehicles such as four wheelers, side by sides, snowmobiles, motorcycles, and with the recent acquisition of Aixam Mega S.A.S, it will now sell mini cars (quadricycles) and mini trucks. Moreover, Polaris also sells relevant garments and gear.

Last year, Polaris increased revenue and free cash flow 21% and 44% respectively. Gross, operating, and profit margins increased 96, 174, and 116 basis points respectively. Polaris only paid out 32% of its free cash flow in dividends and currently pays out $1.68 per share for an annual yield of 1.8%.

Cash calculates to 60% of stockholder’s equity as of the end of last year. Polaris’ long-term debt to equity stood at 14%. Return on equity stood at an impressive 45%.

A great deal of opportunity awaits Polaris and its shareholders. Polaris plans to reintroduce the iconic Indian motorcycle brand later in 2013. The Aixam Mega S.A.S acquisition gives Polaris a greater foothold in the European markets that will allow it to better capitalize on any economic rebound that may occur there.

More than just snowmobiles….

You may be interested to learn that Artic Cat (NASDAQ: ACAT) makes more than just snowmobiles. It makes ATVs and side by sides as well. In fact, ATVs and side by sides comprised 45% of Artic Cat’s FY 2013 revenue. These two product lines also represented the highest growing segment, increasing 32% during that time. Snowmobiles by contrast only increased 5%.

Last year, Artic Cat increased revenue 15%. Gross, operating and profit margins all increased 15, 120, and 80 basis points respectively. Free cash flow declined 81% due to increased capital expenditures and lower operating cash flow.

Artic Cat possesses an excellent balance sheet with cash and investments comprising 65% of stockholder’s equity as of the end of last year. It possesses no long-term debt. Artic Cat’s return on equity clocks in at 23%.

As macroeconomic conditions improve, Artic Cat will benefit as people begin to spend more money on recreational vehicles such as ATVs, side by sides and the corresponding gear. If weather allows, people will buy more snowmobiles as well.

The one and only

Harley Davidson (NYSE: HOG) not only manufactures and sells motorcycles, it has built an entire sub-culture around it. Bike riders wear Harley Davidson merchandise such as jackets, gloves, and leather pants. This culture helps keep the Harley Davidson brand alive and well.

However, in 2012, Harley Davidson’s fundamentals didn’t quite fare as well as its smaller more diverse competitor Polaris. Revenue only increased 5%. Its free cash flow declined 12%.

Harley Davidson did recently boost its dividend. Last year it paid out only 23% of its free cash flow in dividends. Currently it pays $0.84 per share per year and yields a fairly decent 1.5%.

As the end of 2012, Harley Davidson’s cash and investments stash equates to 47% of stockholder’s equity. Harley Davidson’s debt resides in the steep range at 171% of stockholder’s equity. Operating income does exceed interest expense by a safe 22 times. Its return on equity calculates to 24%.

You may argue that Harley Davidson faces demographic tailwinds with the aging of the baby boomers. However, Harley Davidson holds 46% market share in the young adult men and women demographic ages 18-34, according to its investor relations website. The Harley Davidson culture will transcend the generations.

Conclusion

In summary, due to the economic recovery consumers will feel more comfortable spending money on luxury items such as motorcycles, ATVs, and snowmobiles. These three companies definitely warrant a place on your Motley Fool Watch List and more of your research time.

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William Bias has no position in any stocks mentioned. 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!

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