Polaris Industries Inc. (PII): Should You Invest in This Small Vehicle Maker?

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As an investor, you want a company that constantly seeks out new markets and products that enhance your cash flow. Motorized products maker Polaris Industries Inc. (NYSE:PII) seeks to do just that with recent acquisitions giving it added access to the European market and the reintroduction of an old iconic motorcycle brand. Looking at this company from the vantage point of strengths, weaknesses, opportunities, and threats will give you a good idea of its direction as an investment.

Polaris Industries Inc. (NYSE:PII)

Strengths

Diversity – As an owner you want a company with a variety of products with one picking up the slack in case another one fails. One of Polaris’ strengths lies in its product and geographic diversity from ATVs, motorcycles, small trucks, quadricycles, and snowmobiles. In addition, this company operates globally. Chairman and CEO Scott Wine realizes this and he has made reinforcing this strength “his personal mission” according to Polaris’ latest earnings call (sign-in required).

Manufacturing processes – Polaris Industries Inc. (NYSE:PII) utilizes efficient manufacturing methodology to reduce manufacturing and lead times to its dealers. In addition to improving return on equity, lower lead times translate into happier end consumers as this lessens the chance of them going to a competitor due to the lack of availability of their desired product.

Snowmobiles – Believe it or not, snowmobiles represented quite a strength for Polaris in its most recent quarter, with sales tripling versus the same time last year. This should raise an eyebrow at competitor Arctic Cat Inc (NASDAQ:ACAT).

Parts, garments, and accessories – Polaris’ product innovations and the acquisition of snowmobile accessory maker Klim served as catalysts for 27% growth in sales for its parts, garment, and accessories segment.

Fundamentals – Polaris Industries Inc. (NYSE:PII)’ strengths translated into good fundamentals. Its revenue increased 11% during its most recent quarter. Free cash flow turned from a negative $22 million to a positive $8 million. Polaris’ cash comprised 52% of its stockholder’s equity during its most recent quarter. Its long-term debt to equity stood at 14%.

Based on full year data, Polaris’ efficiency shows with return on equity clocking in at 45%, nearly double that of rivals Harley-Davidson, Inc. (NYSE:HOG) and Arctic Cat, which showed returns on equity of 24% and 23%, respectively.

Weaknesses

On road vehicles – On road vehicles showed the greatest weakness for Polaris, at least in its most recent quarter. Sales declined 3% due to lower motorcycle volume according to its latest earnings call.

Harley-Davidson retains the nationwide king of the motorcycles title with its largest competitor only commanding roughly 13% according to Harley-Davidson’s CFO in its most recent earnings call (sign-in required).

Opportunities

Indian motorcycles – Harley-Davidson’s market lead hasn’t dissuaded Polaris from trying to upend its market leading status. Polaris intends to reintroduce the iconic Indian brand later in 2013. While this may only make a dent in Harley-Davidson’s market share, it should prove to be a boon to Polaris’ shareholders as some consumers prefer options in the heavyweight motorcycle market. Management expects the Indian Motorcycle to contribute to a 50%-60% increase in its on road vehicle sales in 2013.

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