Arctic Cat, Polaris And Harley Davidson Drive Sales
The fast-rising sport of off-road vehicles, ORVs, has become a smaller, dustier version of the muscle car wars fought between U.S. automakers during the 1960s.
Polaris ( PII ), the company that launched the off-road power contest, again staked out high ground this year with its RZR XP 1000. The 107-horsepower, side-by-side trail-gobbler raises the stakes for manufacturers includingArctic Cat ( ACAT ),Deere ( DE ) and Kawasaki, and it broadens the horizons of the increasingly popular sport.
Until about five years ago, side-by-sides were typically referred to as utility-terrain vehicles or UTVs. They were slow and stodgy, mainly used by hunters, farmers and ranchers to haul heavy loads. Then manufacturers lowered the center of gravity, added aggressive suspension and boosted the horsepower, luring a more adrenaline-thirsty breed of weekend warriors.
Quads -- the four-wheelers often referred to as all-terrain vehicles, ATVs, ridden more like motorcycles and steered with handlebars -- pioneered the new era. But consumers seeking more comfort, safety and speed are rapidly trading up to the more pricey vehicles.
"All kinds of customers are selling their ATVs and buying side-by-sides," said Roger Miya, owner of LA Cycle Sports . The Polaris dealer of Inglewood, Calif. sells three side-by-sides for every ATV. His side-by-side sales have tripled since he started selling them in 2010. It's a trend he sees continuing for a few years until manufacturers introduce something bigger and better.
With prices starting near $10,000 and ranging to well above $20,000, side-by-sides have become a profit center for leisure-equipment makers who have fought for years to diversify. High-end, rural consumers remain the central audience: farmers, ranchers, large-estate owners and middle-aged, upper-middle-class men who love the outdoors and rugged rides.
The sales have helped boost the 13 stocks in IBD Leisure-products group 52% year to date.
Cats, Indians, Razors And Hogs
Arctic Cat ( ACAT ) rolled out 13 side-by-side models for model-year 2014. Snowmobile sales, which tend to be seasonal and affected by the amount of snowfall, were 39% of sales last year. Still, shares surged 73% year-to-date.
Polaris, the most diversified name in the group, zipped up 59% this year. The company owns Victory brand motorcycles and, in 2011, acquired the Indian motorcycle brand. Investors are betting on the company's new lineup of side-by-sides and reintroduced Indian products to drive sales. Snowmobiles were only 9% of Polaris sales last year, down from 19% a decade ago.
Also in the group,Harley Davidson ( HOG ) -- which unveiled a new generation of technologically advanced motorcycles this year -- has zoomed 34%.
Industrywide recreational side-by-side sales are 20% higher than pre-recession levels while ATV sales have dropped 70% from their 2006-07 peak, according to Power Products Marketing. The industry research firm forecasts side-by-side sales in North America will rise 5% in 2013.
ATV owners are upgrading to side-by-sides because they go fast with less rollover risk. They also let two people sit next to each other, versus the sit-behind design for quad ATVs, said Gerrick Johnson, an analyst with BMO Capital Markets.
Nearly A Million Per Year
Sales of off-road vehicles -- including side-by-sides, ATVs and snowmobiles -- totaled roughly 915,000 globally in 2012 and have averaged 8% growth since bottoming in 2010, according to William Blair. Side-by-side sales have climbed at a 20% annual pace.
Fox Factory Holdings ( FOXF ) has seen its shares climb 29% since debuting on the Nasdaq in August. The Scotts Valley, Calif., company built its name designing and manufacturing high-performance suspension products primarily for mountain bikes, side-by-sides and a wide range of other vehicles. William Blair expects it to grow earnings by 20% and sales 10% annually over the next three years.
Arctic Cat of Plymouth, Minn., forecasts sales to grow 15% for the fiscal year ending in March 2014, and 12%-14% for fiscal 2015. Analysts expect earnings growth of 13% this fiscal year and 17% in 2015. With a market cap of $773 million, it counts more than 1,500 dealers worldwide.
Polaris -- the leading U.S. ORV producer followed by Deere, Kawasaki and Kubota -- looks to its new RZR XP 1000, with a $20,000 base price, to bolster its lead.
"The side-by-side promises to be more agile and better handling than anything currently in production thanks to a new chassis and suspension including exclusive 'needle' shocks," Raymond James wrote in a client note. "Its 999cc engine produces more horsepower (107) than the competition."
Polaris sees 70% of its sales from off-road products. Analysts are betting the rebirth of the iconic Indian Chief family of motorcycles will drive on-road sales. Three new models of the country's oldest reviving motorcycle brand, ranging from $19,000 to $23,000, were unveiled at the massive annual biker rally in Sturgis, S.D., in early August.
The brand relaunch "should enable Polaris to achieve its goal of (adding) 125 to 140 North American and 70 international dealers by year-end 2013," Wells Fargo Securities analysts wrote in a client note Aug. 5. They estimated Polaris could ship 1,500 units of Indian in the latter four months of 2013 and as many as 8,000 units in 2014.
Polaris projects overall 2013 full-year sales will grow 13%-15% over last year. It sees earnings rising 18% to 20%. The Medina, Minn.-based firm targets average annual sales growth of 12% from 2013 to more than $8 billion by 2020.
The global market for motorcycles, including electrically powered machines, will grow 7% a year to 134.5 million units in 2016 with revenues totaling $90 billion, forecasts the Freedonia Group. Asia will continue to dominate worldwide demand, accounting for 84% of all units sold in 2016, the Cleveland, Ohio-based market research firm claims.
Improving living standards will stoke demand in emerging markets, where people prefer riding a motorcycle over public transportation, walking or bicycling. Rising oil prices will drive demand for highly fuel-efficient vehicles along with a rebound in consumer demand for recreational products as the economy recovers, Freedonia wrote in a report.
Harley-Davidson accounts for 57% of all new heavyweight motorcycle registrations in the U.S. and 13% in Europe. The Milwaukee, Wis.-based firm produces about 30 heavyweight models that range from $13,000 to $53,000. In August the 110-year old company unveiled the largest new model launch in its history: eight new models developed under an initiative dubbed Project Rushmore.
The new Harleys feature more power, voice recognition technology, Bluetooth connectivity, touch screen global positioning systems (GPS), music, wider and deeper seats along with new back and arm rests. The new Touring line of bikes aim to present an enticing trade up, given about 85% of Harley customers say they'll buy again and on average replace their motorcycles every four years, say analysts at William Blair.
The firm, which weighs in with a market capitalization of $14.6 billion, claims the new bikes "pass faster, stop quicker and see farther at night," and are built with next-generation engines.
In addition, the new liquid-cooled engines could drive sales of the remaining old-model bikes still on dealer floors, UBS wrote in a client note Aug. 19.
"The change this year may spark demand for what some could view as the last of the true Harley power train," the note said.
Poor weather dampened Harley's sales in second quarter. Demand should improve in the second half of this year thanks to a rebound in construction employment, which has 74% correlation with Harley's retail sales, reports Goldman Sachs' analysts.
With about 1,600 dealerships worldwide -- more than half of which are overseas -- the company aims to open 100 to 150 new foreign dealerships through the end of 2014. Last year, it sold nearly 250,000 units worldwide, up 6% over 2011. The company expects unit sales to pick up 3.6% to 5.6% to 259,000 to 264,000 this year. But that's still deeply below its pre-recession 2008 level of more than 300,000.