Polaris Industries: Ready To Rally

Welcome, reader. In this article, we are going to review the state of Polaris Industries, Inc. (NYSE:PII) as they are today, following the company’s rapid expansion from $1.6B annual sales to their most recent report’s $6B sales (Polaris Industries’ FY2008 10-K, FY2018 10-K). Growth has come primarily through acquisition and expansion into the Australian market.

After reviewing the company’s financial results, which I outline below, I have to say the company appears to be in good shape. I am bullish Polaris Industries stock as I believe their operating earnings and business position are being undervalued at $84.43.

Polaris Industries’: Activity From The C-Suite

The growth through acquisition since 2008 has transformed the state of this business: From carrying no long-term debt outside of their credit facility to issuance of a couple billion in debt of which $1.95B in long-term bonds remains outstanding. The company also operates on a more global scale, coming with the commensurate risks in foreign currency incomes such as from their expansion into Australia.

Returning to favorable aspects of the business, reviewing the company’s reports from both pre and post the great recession indicate a surprisingly resilient sales number. The company made a full 80-90% as many sales or better, taking out revenues acquired during the period, during the recessionary period as they did during the years 2004-2006 and maintained profitable operations to boot.

The robust profitability of those lines is a good sign the business will continue generating enough cash to protect shareholder value from negative economic events so long as they do not become much more leveraged. Continuing their streak of strong sales is important here because the company’s growth in long-term debt will be a substantial weight on the bottom line until the bonds are retired.

All in all, because of the robustness of profits during downturns, so far, their acquisitive behavior is defensible for conservative investors.

How Threats To Polaris Have Increased Throughout This Period Of Rapid Growth

Inventory turnover has slowed down considerably from typically exceeding 8 turns per year, which the company achieved over many years, to recent reports of a turn rate at 6.6. Adding more high-cost products such as with the company’s recently closed acquisition of Boat Holdings, LLC for $805M is likely going to drag their inventory turnover lower.

The threat here is, while selling bigger and more expensive items for a healthy profit margin is great (and reduces the turnover number cited above), in the case of an economic slowdown, we’re going to see worse performance from the business as credit for big purchases dries up. So, in the case of setbacks, the stock won’t be able to avoid being depreciated due to earnings deterioration despite their history of robust earnings.

Polaris’ Top Tier Brands

As a result of the Boat acquisition, the company now owns the boating names Bennington, Godfrey, Hurricane, and Rinker. Through this acquisition, Polaris has increased their exposure to the growing popularity of the pontoon boat.

Their ATV and Snowmobile businesses are each among, if not the biggest, players in their respective industries. And, the company’s Indian Motorcycles brand is legendary among bikers. All in all, the branding picture is good, with Polaris owning top global brands in most of their lines of business.

Money Talks: I Am Bullish Polaris Industries

Polaris cleared $251M of free cash flow available to owners for 2018 after making their typical volume of capital expenditures. Hence, the maximum dividend distribution they might be able to make at today’s earnings, and stock price level attains to a theoretical dividend yield of 4.77%.

Cash from operations came in at $477M during the recent year, about $100M lower than their all-time high takes of 2016 and 2017. The stock is trading at a price to earnings ratio of 16.51x, a 27% discount to the broader market as measured by the S&P 500 and a more modest 9% discount to the DOW Industrials Index at a P/E of 16.99.

I believe the DOW Industrials is a good comparison because of the large amount of manufacturing operations (reflected in that index’s lower P/E). However, I believe Polaris deserves a premium to the DOW P/E because of their strong profit margins and industry-leading position.

Odds are good we will see the company’s cash from operations improve, in part because of the addition of more big-ticket items to their product mix via the Boat purchase. Big ticket durable products tend to generate a lot of cash upfront.

The figures are stacking up nicely, with a long track record of successful business operations, the company has built up substantial vertical integration in their product manufacturing process which helps them protect profit margins long term.

My take: Polaris is a solid pick for a long-term buy and hold from today’s price.

Supplementary Data:

Data by YCharts

In the red line, we can see the Polaris has shrunk total shares outstanding by roughly 9% since 2015, making steady progress. Juxtaposed with their share price, it appears management has been chasing the stock price up on these purchases, which is unfavorable for long-term shareholders.

The company is in the first innings of its second decade as a leveraged corporate. At 33% debt to revenue, the company is soundly positioned, and as an investor, I’d like to see them accumulating cash while maintaining the dividend and deploying a small portion of cash to buy back stock below $100 per share.

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Disclosure: I am/we are long PII. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article is not intended to provide tax, legal, insurance, or investment advice, and nothing in the article should be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security by Faloh Investment. We are not investment advisors. You alone are solely responsible for determining whether any investment, security or strategy, or any other product or service, is appropriate or suitable for you based on your investment objectives and personal and financial situation. You should consult an attorney or tax professional regarding your specific legal or tax situation.

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