Polaris is one of the longest-operating brands in powersports.

Business Strategy & Outlook

Polaris is one of the longest-operating brands in powersports. Its brands, innovative products, and lean manufacturing yield the firm a wide economic moat and that it stands to capitalize on its research and development, solid quality, operational excellence, and acquisition strategy. However, Polaris’ brands do not benefit from switching costs, and with peers innovating more quickly than in the past, it could jeopardize the firm’s ability to take price and share consistently, particularly in periods of inflated recalls or aggressive industry discounting.

Polaris had sacrificed some financial flexibility after its transformational acquisitions of TAP (2016) and Boat Holdings (2018), but debt-service metrics have been rapidly worked down via EBITDA expansion and cost-saving scale benefits (with debt/adjusted EBITDA set to average around 1.0 times over the forecast). This unlocks Polaris ability to continue to serially acquire strategic businesses (with opportunities likely in the marine and parts and accessories segments), which could help stimulate incremental demand. For now, a 8% top-line lift in 2022 (after accounting for the expected sale of TAP), as Polaris attempts to fill advance orders and backfill dealer inventory, a rate one can think will return to a low-single-digit rate in 2024 (if scarce dealer inventory levels are remedied). International (low-double-digit percentage of sales) expansion over the long term also remains promising and could drive demand upside, particularly as Polaris increases its global operating footprint with a wider physical presence abroad. As evidenced by solid ROICs (at 26%, including goodwill, in 2021), Polaris still has top notch brand goodwill in its segments, supporting consumer interest and indicating the firm’s brand intangible asset is intact. However, with constraints in the supply chain, 2022 could see some volatility in market share gains, depending on the availability of certain products at retail (the snow segment suffered this plight in the most recent quarter). The modest market share gains to ensue ahead, signaling the firm’s competitive edge is intact.

Financial Strengths

Exiting the recession, rising profits led to increases in company equity, which helped reduce debt/capital from 49% in December 2009 to 31% in December 2015. With the addition of leverage from the acquisition of TAP (which is set to be sold in 2022), and the financing of Boat Holdings in 2018, Polaris ended 2018 with debt/adjusted EBITDA above 2 times and debt/capital of 69%. However, they expect robust demand and successful execution through COVID-19 to restore the metrics to 47% and to 1.1 times, respectively, at the end of 2022, a very manageable level that the company should be able to maintain. Additionally, Polaris is poised to produce strong cumulative free cash flow to equity over the next five years’ worth around $3.4 billion; thus, there should be no concern repaying debt as it comes due. The current revolver ($1 billion) and corresponding term loan ($900 million) are set to mature in 2026. And in December 2021, Polaris secured an incremental 364-day term loan for $500 million, which can be refinanced if needed. There is no meaningful debt coming due until 2026, confirming the opinion that Polaris has plenty of financial flexibility. The company maintains flexibility in its capital structure through stock repurchases and dividends. Polaris has restored share repurchases in 2021 as demand has proved consistent through COVID-19, and it will continue to fund (and grow) its annual dividend, which is currently set at $0.64 per share quarterly (2.5% yield).

Bulls Say

Polaris has historically had a strong reputation for innovation, and new product lines and acquisitions have supported solid performance in both strong and difficult environments.

Profit margins could tick up faster than with faster than enterprise average volume growth from the sizable off-road and low operating expense marine business segments.

Management remains focused on operating as a best-in-class manufacturer. With continuous improvement at existing facilities, the pursuit of excellence should support stable operating margin performance.

Company Description

Polaris designs and manufactures off-road vehicles, including all-terrain vehicles and side-by-side vehicles for recreational and utility purposes, snowmobiles, and on-road vehicles, including motorcycles, along with the related replacement parts, garments, and accessories. The firm entered the boat market after acquiring Boat Holdings in 2018, offering exposure to new segments of the outdoor lifestyle market. Polaris products retailed through more than 2,500 dealers in North America and through 1,500 international dealers as well as more than 30 subsidiaries and 90 distributors in more than 120 countries outside North America at the end of 2021.

(Source: Morningstar)

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