Polaris Industries (NYSE: PII) reported its Q2 earnings yesterday for the quarterly period ended June 30, 2022. Earnings per share (EPS) of $2.42 beat FactSet consensus estimates of $2.08. Company revenues of $2.06bn missed FactSet sales consensus by -5.1% which was $2.17bn.
What is Polaris Industries?
Polaris Inc. engages in designing, engineering, and manufacturing power sports vehicles. These include off-road, on-road, snowmobiles and motorcycles.
Polaris’ high-quality product line-up includes the Polaris RANGER®, RZR® and Polaris GENERAL™ side-by-side off-road vehicles; Sportsman® all-terrain off-road vehicles; military and commercial off-road vehicles; snowmobiles; Indian Motorcycle® mid-size and heavyweight motorcycles; Slingshot® moto-roadsters; Aixam quadricycles; Goupil electric vehicles; and pontoon and deck boats, including industry-leading Bennington pontoons.
The company was founded by Allen Hetteen, Edgar E. Hetteen, and David Johnson in 1954 and is headquartered in Medina, MN.
As the global leader in Powersports, Polaris Inc. pioneers product breakthroughs and enriching experiences and services that have invited people to discover the joy of being outdoors since its founding in 1954.
Polaris enhances the riding experience with a robust portfolio of parts, garments, and accessories. Polaris serves more than 100 countries across the globe.
PII Q2 Financial Results
On Tuesday, July 26, 2022, Polaris Industries reported its financial results for its second quarter, which ended June 30, 2022.
Key Earnings Highlights:
Revenue: $2.06bn (up 8% Y/Y)
Diluted EPS: $2.34 (down 5% Y/Y)
Adjusted Diluted EPS: $2.42 (down 7% Y/Y)
Continued supply chain challenges were blamed for the quarter's 23% Y/Y drop in retail sales. Inflationary pressures are also evident.
Nevertheless, improved operational performance, strong pricing and stable demand supported by a healthy consumer paint an optimistic picture.
Mike Speetzen, Chief Executive Officer of Polaris Inc, said:
Our results during the second quarter reflect our team’s commitment to our customers through industry-leading innovation and exceptional execution, despite the ongoing supply chain constraints impacting the global economy.
While we are closely watching a number of demand indicators to understand the resilience of the consumer in this environment, we continue to see a healthy consumer and stable demand.
The company saw share trends improve late in Q2 as availability improved, and it foresees this continuing in the second half of the year.
PII stock also appeared in our earnings preview this week.
How Does Polaris Industries Make Money?
Polaris Industries makes money from the sales of its power sports equipment which it splits into income from off-road, on-road and marine.
YTD Revenue Breakdown by End Market:
PII Stock Financials
PII stock has a price-to-earnings ratio (P/E) of 25.6, compared to the industry average of 1.3. Its price-to-book value (P/BV) is 5.9, above the industry average of 1.7. PII stock offers shareholders a 2.3% dividend yield.
Over the past year, Polaris Inc (PII) has traded between $94.24 and $139.79. Year-to-date, the Polaris Inc (PII) stock is down by -0.18%, while the S&P 500 is down -18.25% over the same period.
PII Growth Potential
While Polaris has seen strong demand since 2019, supply chain challenges have constrained the industry’s ability to deliver. As a result, Polaris has only grown at a 2% CAGR over the past four years. Therefore, despite strong demand, Polaris has not seen outsized growth.
Polaris believes a new optimal inventory level sits around 2.5 times higher than current inventory levels. It estimates this to total around $750m.
Reviewing its five-year strategy, the company is getting closer to being a core Powersports company. Last month Polaris divested its Transamerican Auto Parts (TAO) business to Wheel Pros. The financial performance of TAP was challenging, and operating expenditure was high. Therefore, Polaris believes this divestiture will help position it as a global leader in Powersports.
Polaris expects sales to grow 13% to 16% in its full-year guidance. This is slightly above its prior guidance due to the removal of TAP. The bump in sales forecast reflects strong growth in the remainder of the year, driven by price and an improving supply chain.
The company projects adjusted diluted EPS to be in the range of $10.10 to $10.30 for the full year 2022, an increase of 11% to 14% from 2021.
However, the company has narrowed its sales expectation for its On-Road segment due to foreign currency and a weaker-than-expected second quarter driven by supply chain constraints.
PII Stock Risks
Along with inflationary and supply chain headwinds, Polaris faces intense competition across all product lines. Therefore, success in this industry depends on price, quality, reliability, styling, product features and warranties.
At the dealer level, competition is based on additional factors, including product availability, sales and marketing support programs (such as financing and cooperative advertising), and dealer and customer perception.
For this reason, the company must invest heavily in enhancing its existing portfolio to compete effectively.
Should You Invest in Polaris Industries?
The Polaris Industries CEO is confident demand remains healthy and stable across the business. Inflation and supply chain disruption continue to weigh on growth, but cancellation rates remain low.
The company targets a higher income demographic, and demand levels appear to be holding for now. Inflation is clearly a concern for investors because even the wealthiest consumers will rein in their spending if the cost of living becomes too high.
Mike Speetzen, Chief Executive Officer of Polaris Inc, said:
I will tell you that the feedback from dealers, they love the innovation that we’ve come out with. They’re seeing the enhancement and the quality of the vehicles. They’re incredibly appreciative of how we’re handling the approach to rework, and the supply chain challenges that are sitting inside the network. And so, they’re giving us really good marks.
Obviously, profitability is at an all-time high, just given how constrained inventories are, and there’s very little discounting going on in the marketplace. Really what they want is more product. And so, we have continued to enhance our communications. We’ve worked to try and take the burden off of the dealer to get caught in between the consumer and us. And so we implemented late last year, the ability for consumers to go in and check on availability, and where their product is in the cycle. And all those things are working in our favor.
At a time when so many retailers are reporting disappointing results, Polaris’ Q2 results are a pleasant surprise. Plus, its outlook for the rest of the year is encouraging.
FactSet analysts have an Overweight rating on PII stock with a target share price of $122.62.
BMO Capital Markets analyst, Gerrick L. Johnson, gave PII stock a Buy rating with a target share price of $138. Meanwhile, Joseph Altobello at Raymond James raised his Buy rating on the stock with a target share price of $137.
As stated above, risks to PII stock include inflation, recession, and competition. Additionally, the financial metrics for PII stock indicate it could be overvalued.
Nevertheless, the 2.3% dividend yield is a nice sweetener. Whether you buy shares in Polaris Industries depends on your conviction in its future performance, appetite for risk and investing time horizon.