Should You Invest in This Small Vehicle Maker?

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

As an investor, you want a company that constantly seeks out new markets and products that enhance your cash flow. Motorized products maker Polaris Industries (NYSE: PII) seeks to do just that with recent acquisitions giving it added access to the European market and the reintroduction of an old iconic motorcycle brand. Looking at this company from the vantage point of strengths, weaknesses, opportunities, and threats will give you a good idea of its direction as an investment.

Strengths

Diversity – As an owner you want a company with a variety of products with one picking up the slack in case another one fails. One of Polaris’ strengths lies in its product and geographic diversity from ATVs, motorcycles, small trucks, quadricycles, and snowmobiles. In addition, this company operates globally. Chairman and CEO Scott Wine realizes this and he has made reinforcing this strength “his personal mission” according to Polaris’ latest earnings call (sign-in required).

Manufacturing processes – Polaris utilizes efficient manufacturing methodology to reduce manufacturing and lead times to its dealers. In addition to improving return on equity, lower lead times translate into happier end consumers as this lessens the chance of them going to a competitor due to the lack of availability of their desired product.

Snowmobiles – Believe it or not, snowmobiles represented quite a strength for Polaris in its most recent quarter, with sales tripling versus the same time last year. This should raise an eyebrow at competitor Arctic Cat (NASDAQ: ACAT).

Parts, garments, and accessories – Polaris’ product innovations and the acquisition of snowmobile accessory maker Klim served as catalysts for 27% growth in sales for its parts, garment, and accessories segment.

Fundamentals – Polaris’ strengths translated into good fundamentals. Its revenue increased 11% during its most recent quarter. Free cash flow turned from a negative $22 million to a positive $8 million. Polaris’ cash comprised 52% of its stockholder’s equity during its most recent quarter. Its long-term debt to equity stood at 14%.

Based on full year data, Polaris’ efficiency shows with return on equity clocking in at 45%, nearly double that of rivals Harley-Davidson (NYSE: HOG) and Arctic Cat, which showed returns on equity of 24% and 23%, respectively.

Weaknesses

On road vehicles – On road vehicles showed the greatest weakness for Polaris, at least in its most recent quarter. Sales declined 3% due to lower motorcycle volume according to its latest earnings call.

Harley-Davidson retains the nationwide king of the motorcycles title with its largest competitor only commanding roughly 13% according to Harley-Davidson’s CFO in its most recent earnings call (sign-in required).

Opportunities

Indian motorcycles – Harley-Davidson’s market lead hasn’t dissuaded Polaris from trying to upend its market leading status. Polaris intends to reintroduce the iconic Indian brand later in 2013. While this may only make a dent in Harley-Davidson’s market share, it should prove to be a boon to Polaris’ shareholders as some consumers prefer options in the heavyweight motorcycle market. Management expects the Indian Motorcycle to contribute to a 50%-60% increase in its on road vehicle sales in 2013.

Aixam Mega acquisition – In April, Polaris purchased France-based Aixam Mega, which makes mini trucks and cars, thereby adding to its product diversity. The acquisition gave Polaris larger access to European markets, adding to its geographic diversity.

Commercial markets – Polaris’ Brutus looks promising in the commercial market. This product looks like a small truck and allows for added attachments such as a snow scraper.

Threats

Competition – Arctic Cat boosted its ATV and side by side sales 32% last year, exceeding the 5% growth rate of its flagship snowmobile products. This increase in ATV sales contributed to a 15% overall boost in Arctic Cat's revenue and indicates a wider diversification on its part. This gives indication of Polaris’ intensifying competition in that space and partially explains why Polaris’ leadership wants to expand its product and geographic base. 

No doubt, Polaris’ reintroduction of the Indian Motorcycle brand captured the attention of Harley-Davidson, which will most likely cause it to step up its product design to match Indian.

Conclusion

As you can see, Polaris’ strong product line, coupled with multiple product and geographic opportunities, should serve shareholders well. While it may never lead in the heavy weight motorcycle segment, the iconic Indian name should prove a boon to the company’s bottom line. Its commercial products, such as the Brutus, should appeal to the commercial market as businesses boost capital spending in this recovering economy. The acquisition of Aixam Mega will give Polaris greater access to the European markets, enabling it to capitalize on any recovery there. This company definitely warrants 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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