Polaris Still Shining

By Stephen D. Simpson, CFA | October 16, 2008 AAA

You might think that a company that sells luxury leisure items, particularly those that are often financed through consumer credit lending, would be in some trouble these days. For most companies, you would be right, but Polaris Industries (NYSE:PII) once again offered evidence of why it is not "most companies".

Performance is Always Relative
I will admit that I probably would not consider Polaris' earnings report to be all that strong if we were in a normal market environment. But when you see other leisure goods companies like Fleetwood (NYSE:FLE) and Brunswick (NYSE:BC) opting to close plants because of the tenor of their business, we are not in a normal market environment. In that context, then, sales growth and more-or-less flat income coupled with higher guidance is not bad.

Looking through the company's numbers, there was some good and some bad. Sales growth in the higher single digits is respectable, though results were boosted by 20% growth in the parts and accessories segment. I was impressed that the company held the line on gross margins (sales of higher-margin products are offsetting rising input prices), but Polaris gave that all back and then some with higher marketing and corporate expenses. Last and never least, cash flow generation is being compressed (relative to a year ago) by higher inventories, but they do not seem to be reaching that troubling "too high" level. (To learn more, read The Bottom Line On Margins.)

Whither (Wither?) The Consumer Market?
It is probably passé by now to point out that our economy is in its current mess because almost everyone took on too much debt in the last few years. Financial institutions leveraged their balance sheet to incredible levels - and did so somewhat in the process of helping consumers leverage their balance sheets to pretty incredible levels. So, it might stand to reason, then, that we are all in for a period of bank-imposed belt-tightening and personal balance sheet repair.

Or, maybe not.

In both the earnings release and during the conference call, Polaris management made the point that they are not seeing all that much compression in the consumer lending environment. While General Electric (NYSE:GE) has curtailed some consumer lending activities, it is still making installment loans for Polaris products and HSBC (NYSE:HBC) is also still on board. With all due respect to Polaris management, I'm going to say "we'll see" with respect to this apparently benign consumer lending environment - prime customers will probably always be able to get financing, but the company may yet see a tougher lending environment for those would-be customers with less spotless credit.

When Times are Tough, Go With the Good Ones
It's tough for me to get excited about anything more risky than TIPS these days, but Polaris is nevertheless one of the solid names in this sector. It's held its own against the likes of Honda Motor (NYSE:HMC) and Harley Davidson (NYSE:HOG), and it produced returns on capital that are among the best in the recreational vehicle space. Maybe this is an example of where value-oriented investors should buy when others are fearful, but just remember that it might take a few years for the consumer market to straighten itself out.

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