PII - Polaris Industries

[Picasso]

This is a high quality business that has seen its shares decimated as a result of the warmer weather and oil downturn.  It's always been an expensive GARP stock that I was fortunate enough to buy in 2008/2009. 

 

High returns on capital, good capital allocation, strong balance sheet, trades for around 12x, and I see no reason why they can't grow for a long time.  However  I don't see any good news or catalyst coming out for these guys in the near future.  I'd expect them to see worsening trends over the next couple years, but somewhere between $50-60 it's trading at a low multiple on what is likely trough earnings (maybe 15x really bad EPS when this is a 20x business). 

 

I know there are some smart guys bearish on this stock so wanted to at least see if anyone was interested in the idea before spending more time describing the business and debating the downside risks.  I could see this trade in the $50's on continued bad energy/GDP figures out of their core markets so to be clear I'm not a buyer yet.

[KJP]

A few questions:

 

(1) For a manufacturing company, Polaris produces a very high return on its invested capital.  How does it do that?  Better products/brand?  My other questions are trivial compared to this one.

 

(2) Through the cycle returns (2004-14) sales growth and returns appear to be strong, but how did it do in 2008-10? 

 

(3) Based on the balance sheet Polaris's financing affiliate appears to be fairly small, but any issues there?

 

(4) I have read about very promotional competition from Arctic Cat and potentially others.  Has that subsided?

 

(5) I have read that most competitors, even foreign-owned, manufacture in the US for the North American market.  Is that true, or does the company face currency-based cost issues at current exchange rates? 

[Simple Investor]

Thanks for posting.  This company has taken a pounding in the past (2008-2009) and became a 10 bagger.  So something to keep an eye on . 

[thepupil]

This is/was the short thesis:

 

1) Polaris makes inordinate profits/margins because it has dominant share in side by sides. During the downturn, Japanese basically exited the market and Polaris invested in their products. As the economy did better, particularly in energy and agriculture, people bought a lot of those ATV's on steroids and all of that benefit accrued to PII, the market then capitalized this boon as if it would happen forever

 

2) now Polaris's typical side by side customer is doing far worse (people who work in energy, industrials and ag, the well-off/aspiring rural/suburban guys buying a toy) and the Japanese have re-entered the market, the market for used has rolled over and there is excess supply of these things...few of the buyers really need one of these things, so sales/margin/market share will go down and continue to go down, estimates will get revised and stock will collapse

 

that's basically happened, but the question is to what degree that has played out, it may have further to go.

 

have little interest in this business. 9X peak earnings may turn out to be a much higher multiple of normalized. wouldn't short either though. generally very well regarded management team and they have a knack for creating markets, they have a nice call option on taking a lot of share from a beleguaered HD

 

 

[Picasso]

pupil, I agree with the short thesis in that this stock can and likely will still drop substantially.  Expectations are somehow still really high and their core markets aren't turning anytime soon. 

 

I just happen to think that in the long-term if you can buy this when it gets bombed out you'll make a lot more than someone who shorted from $150+.  It probably gets there in the next year or two so thought I would mention it now so people can at least start the due diligence. 

 

KJP, I'll try and answer your questions tomorrow (PII is low priority for me right now) but in general the brand is top notch and they run a very lean operation.  I would ask friends who own their products and it was always a status/quality thing versus trying to get the most bang for the buck.  But this is one of those situations where you're absolutely seeing peak figures.  It's just amazing to me that the stock has priced in that peak so rapidly.

 

And I guess what pupil or the short thesis is trying to say is that this isn't a 20x business (when I say 20x, I'm implying it's a high quality business not that it should trade for 20x 2016 EPS).  Maybe the fundamentals have changed a lot since I originally bought/sold but I'm not yet convinced either way.  I'm sort of hoping someone can kill the idea for me or it goes on my shopping list as we hit maximum pessimism.

[bci23]

This is a high quality business that has seen its shares decimated as a result of the warmer weather and oil downturn.  It's always been an expensive GARP stock that I was fortunate enough to buy in 2008/2009. 

 

High returns on capital, good capital allocation,

 

Didn't they spend something like $300m buying back stock at an average price of $135/share? Sure maybe the stock will be $250 in 5 yrs and those buys will look intelligent but right now they are looking silly. The valuation at $135 certainly didn't scream bargain to me. Mgmt buying back stock to drive up EPS at any cost, sweet.

 

edit: just verified, $293.6m at an average price of $134.75 in 2015.

[Picasso]

I consider what they've done for the past 10+ years good capital allocation including earlier buybacks and acquisitions.  But yeah not so smart buying at the recent highs when they probably know the business trends and competition a lot better than we do. 

 

I'm throwing this one in the bad idea bucket even at $50-60 prices.  I had to ask one of my more outdoorsy friends back in 2008/2009 what made Polaris special with their high returns on capital, etc.  We went to a dealer and talked with a few of his friends who were much more familiar with the market and it was clear that Polaris had the dominant position in the quality, higher end products.  Spoke with him today and he basically confirmed that Yamaha is now making products on par if not better and at better prices than Polaris.  He doesn't think Polaris will stay dominant if Yamaha keeps it up, and the decision by Japan to go negative and continue to devalue the yen probably makes that even harder for Polaris.  Japan was much different back in 2008/2009.

 

If the stock gets cut in half from here I might go check out Yamaha versus Polaris in person but at this time just seems premature.

[CorpRaider]

Yeah never been cheap enough for me.  Like some of those new Indian and Victory bikes a lot.

[bci23]

I consider what they've done for the past 10+ years good capital allocation including earlier buybacks and acquisitions.  But yeah not so smart buying at the recent highs when they probably know the business trends and competition a lot better than we do. 

 

I'm throwing this one in the bad idea bucket even at $50-60 prices.  I had to ask one of my more outdoorsy friends back in 2008/2009 what made Polaris special with their high returns on capital, etc.  We went to a dealer and talked with a few of his friends who were much more familiar with the market and it was clear that Polaris had the dominant position in the quality, higher end products.  Spoke with him today and he basically confirmed that Yamaha is now making products on par if not better and at better prices than Polaris.  He doesn't think Polaris will stay dominant if Yamaha keeps it up, and the decision by Japan to go negative and continue to devalue the yen probably makes that even harder for Polaris.  Japan was much different back in 2008/2009.

 

If the stock gets cut in half from here I might go check out Yamaha versus Polaris in person but at this time just seems premature.

 

I know employees at Polaris and I can confirm much of what you heard about competition making as good or better products is echoed by many Polaris employees today.

[Picasso]

Hear anything interesting besides Yamaha eating into the side-by-side business?

[bci23]

I want to say Honda was another name mentioned.