Polaris Industries Sees Strong Off-Road Vehicle Sales

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Anyone who has ever cranked up an off-road vehicle and gone hauling through wide open spaces knows how addictive the experience can be.

It's not just the screaming of the motor or the jolt of adrenaline you get when you hit the accelerator and go roaring off. It's the fact that you can go where you want, as fast as you want, without having to worry about traffic lanes or patrolmen or drivers whose sole purpose in life seems to be figuring out new ways to annoy you on the road.

Those are just a few of the reasons off-road vehicles comprise a multibillion-dollar market in the U.S., and why companies likePolaris Industries ( PII ) keep pumping out robust growth.

Polaris makes all-terrain vehicles (ATVs), snowmobiles and motorcycles, as well as parts, garments and accessories. It sells through a network of 2,000 dealers in North America, five subsidiaries and 40 distributors in more than 120 countries worldwide.

The company's brands include RZR and Ranger ATVs, Indian and Victory motorcycles, and Polaris Rush snowmobiles.

The popularity of Polaris' vehicles and gear have helped the company run off 11 straight quarters of double-digit sales and earnings growth despite a challenging macro environment.

Industry Trends

"While (industry) trends have been negative, we have seen sales trends improve and think pent-up demand should benefit the company," Citigroup analyst Gregory Badishkanian noted in a third-quarter earnings report.

He expects Polaris' revenue growth to outpace overall U.S. industry growth next year "due to strong new-product launches and exposure to faster-growing segments (international and utility) not tracked by industry data."

Polaris has delivered 10 straight quarters of 20%-or-better sales growth, though that growth has decelerated in five of the past six quarters.

During the third quarter, the company's sales rose 21% vs. the prior year to $879.9 million. That was the lowest rate of growth since March 2010, but still easily topped consensus analyst estimates for $830.5 million.

Polaris reported gains across all product categories during the quarter, led by strong sales of its side-by-side off-road vehicles. These are multipassenger, off-road all-terrain vehicles that can carry up to six passengers in addition to cargo.

The company also racked up solid gains in sales of heavyweight highway-cruising motorcycles. Polaris management noted that North America Victory retail sales grew more than 25% during the quarter.

"That is up from the low double-digit pace in Q2 and is significantly better than the total heavyweight (motorcycle) market, which declined single digits in the quarter," said Edward Aaron, analyst at RBC Capital Markets.

Polaris posted earnings of $1.33 a share during the third quarter, up from 95 cents the prior year and 13 cents above Wall Street views.

"The revenue and earnings growth was due to strong demand ... as well as market-share gains for its Ranger and RZR side-by-side off-road vehicles, continued product innovation, manufacturing realignment and cost management programs," Zacks Equity Research said in a report.

Sales of parts, garments and accessories also moved higher as Polaris rapidly expanded its product lineup for the 2013 model year. Meanwhile, international revenue continued to post gains amid improved sales in the Asia-Pacific and Latin American regions.

To help meet rising demand, Polaris also boosted its product inventory during the quarter. Total dealer inventories grew 23% in North America. Off-road vehicle (ORV) inventories were up 18%, motorcycle inventories were up 37% and snowmobile inventories were up 39%.

"Management views the inventory growth in ORV and motorcycle as necessary in light of growing demand and an expanding product line," RBC's Aaron said. "Snowmobile inventory is clearly high, but this is partly a timing issue. We expect dealer inventories to show continued, albeit moderating, year-over-year growth over the next few quarters."

Polaris' third-quarter results would have been even better if not for "a few holes" in certain markets and product categories, Aaron says.

European Market

"Areas of scrutiny included decelerating North America retail sales, indications of increasing promotional activity, a weak European off-road vehicle (market) and lower-than-expected growth contribution from adjacency businesses," he said.

Aaron also says Polaris has been rapidly building cash reserves and is likely to use some of that cash for buyouts.

"Management indicated that it will likely draw down its cash balance to execute M&A, and that the pipeline of acquisition targets is currently robust," he said. "The company is also actively looking to build assembly capacity in Eastern Europe."

Polaris should continue to deliver solid profit growth in coming quarters. Analysts polled by Thomson Reuters expect full-year earnings to rise 37% in 2012 and 18% in 2013.

The company's stock price has been on a strong run as well. Shares are up more than 50% since the beginning of the year and hit a record high of 89.83 in October. The stock currently trades near 85.

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

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

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