Polaris Hogs Off-Road Limelight, New Cycles Hit Roads

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Off-road vehicle kingpin Polaris Industries is getting more serious about cranking up its business on the road, where Harley-Davidson rules.

At a recent annual mega-biker festival -- the Sturgis Motorcycle Rally in South Dakota --Polaris ( PII ) introduced its newest Indian Motorcycle model, the Scout.

At just less than $11,000 retail, the low-seated Scout -- a famous Indian brand from 1920 to 1949 -- competes withHarley-Davidson 's ( HOG ) entry-level Sportster.


It was the fifth model in Polaris' Indian-branded motorcycle line, which just a week earlier saw the debut of a high-end touring bike called the Roadmaster.

At nearly $27,000, the Roadmaster is comparable to Harley's popular Road Glide.

New Growth Avenue

Polaris acquired the 113-year-old Indian biker brand in 2011 and has spent the years since on re-launching new and improved Indian models, starting with three last year.

"It's a new avenue of growth for Polaris," said Tim Conder, an analyst with Wells Fargo Securities.

While Polaris might be David to Harley's Goliath in motorcycles, Conder says that innovations from Polaris and Harley will allow both companies to grow the motorcycle market and take share from other competitors.

Polaris' revitalized motorcycle business also includes the Victory brand, which Polaris started from scratch in 1998.

A soon-to-launch three-wheeler known as the Slingshot will be a niche on-road bike to appeal to younger powersports enthusiasts.

Despite the big move into road cycles, Polaris is "still about off-road vehicles," Conder said.

About two-thirds of the company's revenue comes from off-road vehicles. They include all-terrain and side-by-side products such as the RZR Sport and Ranger utility lines.

Polaris has the No. 1 market share in both side-by-sides and all-terrains.

"We created the sport-recreation market," Chief Executive Scott Wine said in a phone interview, noting that Polaris created the first RZR side-by-side sports vehicle in 2007.

The company began making side-by-side utility vehicles in 1998. Its all-terrain vehicles got rolling in 1985.

The firm's original snowmobile business, a separate unit, began in 1954. It's why Polaris is celebrating its 60th anniversary this year.

Snowmobiles account for only a small percentage of the company's current revenue, however.

"It's a mature industry," Conder said.

As for the rest of the company's off-road vehicles, Polaris recently launched 18 new products, including a model that steers through mud.

"They continue to gain share from their competitors in off-road because they continue to lead with innovation," Conder said. "They're gaining share against everybody."

Harley doesn't compete in the off-road segment, but plenty of Japanese companies do, as well asArctic Cat ( ACAT ).

Polaris' off-road vehicle sales in the second quarter rose 13% from a year earlier to $710.5 million, led by North American share gains in side-by-side models.

Total revenue climbed 20% to a little over $1 billion, while earnings grew 26% to $1.42 per share.

Polaris' motorcycle division -- which saw Q2 revenue more than double to $103.1 million -- delivered faster growth than the off-road segment. But the motorcycle category still lost money due to investments in the Indian brand.

Wine says that Polaris has invested close to $100 million in Indian, not only to buy the company but also to make engineering changes and other upgrades, and to market the bikes.

He expects Indian to turn its first profit in the fourth quarter and to log its first profitable year in 2015.

"(Wall Street) is familiar with (Polaris) as a side-by-side story; we believe motorcycles will help fuel the next leg of growth," analyst Trey Grooms of financial-services firm Stephens noted in a recent research note that began coverage with an "overweight" rating.

Polaris said that Q2 demand for Indian motorcycles was "robust" as additional dealers began selling the bikes and awareness of the brand's revival continued to gain steam in the biker community.

"Keep in mind that the Indian brand only started rolling out in the last six to nine months, and in Q2 it had opened only in a little more than half the U.S. dealers it has signed so far," UBS analyst Robin Farley said in an email.

Indian Motorcycle was founded in 1901 in Springfield, Mass., two years earlier than Harley. Polaris bought the brand for an undisclosed sum from a private-equity and investment group.

Meanwhile, Harley has lost market share in two of the last three quarters, Farley says. But the decline is apparently due to temporary internal issues rather than just Indian share gains.

Still, Indian "gained more than what Harley lost in U.S. retail sales," Farley said.

Indian's market share vs. Harley is still small. CEO Wine says Harley has 52% of the overall motorcycle market in North America to Polaris' 3% for both Victory and Indian.

In heavyweight motorcycles alone, Harley's share is around 80%, Wine says. That compares to 7% for Victory and 8% for Indian.

Victory sales in Q2 were down modestly due to a crankcase problem that caused the recall of 872 bikes.

"Victory is decent, but it's not Harley. It's not Indian. It's notHonda ( HMC )," Conder said. "It doesn't have the brand history or the background of those brands."

Indian "will help Polaris further accelerate its motorcycle growth," Conder said.

No One-Trick Pony

The Scout is expected to help fuel that growth as its low price and modest size yet mighty engine are expected to draw newcomers to the biker world.

The Scout is "not just a one-trick pony," Farley noted. For one thing, it comes with an engine that's not used on other Indian models.

"Companies don't make new engines for one bike model. All that engineering work means we can expect more bike models in the future in this category," Farley wrote in a client note.

Sales of Polaris' small vehicles are also growing at a fast clip. They rose 29% in Q2 to $43.5 million. Wine describes the electric and diesel vehicles as "alternative means of transportation" for personal and commercial uses.

Meanwhile, Polaris' sales in parts, garments and accessories increased 20% to $159.7 million. "It's our most profitable business," Wine said. "We see a lot of opportunity for continued growth in that space."

The company also has high hopes for international sales, now less than 20% of revenue.

"My long-term goal is to have a third of our sales outside North America," Wine said.

Europe makes up the largest portion of overseas sales, but the strongest growth is coming from Asia-Pacific and Latin America.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.




This article appears in: Investing , Investing Ideas

Referenced Stocks: PII , HOG , ACAT , HMC

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