Beauty is in the eye of the beholder. And in this beholder’s eye, Polaris Industries (NYSE: PII) manufactures the most elegant and most aesthetically pleasing motorcycles on the market.
When you think of Polaris (if you think of Polaris), off-road four-wheel vehicles are probably what spring to mind. You’re not wrong to think that. These vehicles, along with snowmobiles, generated 78% of Polaris’ annual revenue last year.
But Polaris has emerged as a leading motorcycle stock. It manufactures the Victory brand of large-displacement V-twin cruisers. The first model, the V92C, was introduced in 1997 and hit the showroom a year later. From this humble start, the Victory line has expanded to 12 models. Victory sales increased tenfold from 2002 through 2011.
Polaris’ motorcycle lineup took a quantum leap forward in 2012 when it began manufacturing the vaunted Indian brand. Today, the Indian line comprises eight gorgeous models ranging in price from $9,000 to $28,000.
Unwilling to rest on its motorcycle bona fides, Polaris created a new motorcycle class with the revolutionary “Slingshot” in 2014. The Slingshot, a three-wheeled motorcycle (two in the front, one in the rear), looks and drives like a car. The Slingshot resembles a roadster, but it’s classified as a motorcycle. Polaris targets $300 million to $500 million in annual Slingshot sales.
Recent history reveals strong motorcycle sales growth. In 2013, Polaris generated $263 million in revenue from motorcycle sales. Last year, it generated $698 million in sales. Yes, that’s more than a doubling in two years. This year, Polaris expects motorcycle sales to rise another 15% to 20%.
Product-wise, Polaris is doing a lot right. Why, then, is its share price doing a lot wrong? This time last year, Polaris shares traded above $140. Today, they trade below $90.
Off-road vehicle sales have stagnated due to reduced demand in the oil and gas market. Key oil-producing states in the United States and provinces in Canada account for 15% of segment sales.
Despite recent headwinds in the important off-road vehicle market, management has kept the goals lofty. The goal is to reach $8 billion in annual revenue by 2020. This implies 12% average annual revenue growth over the next four years. Management targets a similar growth rate for net income.
If past is prologue, investors should give management the benefit of the doubt.
Over the past five years, Polaris revenue has grown at an 18% average annual rate, net earnings have grown at a 25% annual rate, and earnings per share have grown at a 26% average annual rate. Polaris management has a record of not only growing the company but growing it to drive shareholder value.
To create more immediate shareholder value, management has stepped up its share buyback program in response to the lower share price. Last year, it repurchased 2.2 million shares. This year, it will repurchase another 2.9 million. In addition, the dividend was once again increased – as it has been annually for decades – with the first-quarter payout.
For 2016, management expects revenue to move up 5% year-over-year. EPS is expected to range between $6.20 and $6.80. Even if Polaris hits the high end of guidance, EPS will be up only 1% year-over-year. Not great, to be sure, but certainly no disaster.
Investors, though, appear to perceive a disaster. Polaris shares trade at less than 13 times the midpoint EPS estimate of $6.50. Twenty has been the average multiple over the past five years. Given Polaris’ ambitious growth goals – and my belief that Polaris will reach these goals – a 13 multiple is ridiculously cheap for such a well-run company.
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