Consumers are still under pressure due to high interest rates and unrelenting inflationary pressures. As a result, they’re holding off on big-ticket purchases as long as they can and among them are discretionary items like recreational vehicles such as snowmobiles, boats, and off-road vehicles (ORVs).
The leading manufacturer in most of those power sports categories is Polaris (NYSE: PII), and the company has felt the effects of consumer cost-cutting.
Polaris reported revenue was down 20% year-over-year in the first quarter of 2024, and that was the latest in a series of disappointing quarters. Investors have responded by gradually selling PII. The share price is down 21.5% over the past year.
Polaris shares traded above $145 per share in 2021 when demand for outdoor vehicles spiked. But since then PII has dropped nearly 43% to trade at around $83 per share.
But even after revenue struggles, Polaris remains either the leader or the runner-up in all of its operating segments. In the economic downturn, the company has still shown the ability to attract new customers.
If inflation eases off, it is highly likely that consumers will flock back to the brand. And Polaris has been working to establish a portfolio of products that are less cyclical than its recreational line, such as vehicles for the defense and farming sectors.
To top it all off, PII is cheaper than it’s been in years, and now pays an attractive 3.21% annual dividend yield.
So is it time to buy Polaris stock?
Why Did Polaris Stock Drop?
Polaris hasn’t been able to meet its revenue and earnings expectations for the last few quarters, and Q1 2024 was no different.
The company’s $1.7 billion in sales was 0.59% less than analysts expected. Polaris had a net income of $3.9 million, which worked out to diluted earnings per share of $0.07.
While EPS was down 96% year-over-year, the company still handily beat analysts’ expectations for the quarter, blowing away expectations by over 150%. Another bright spot for Polaris was how it gained market share in the ORV, motorcycle, and marine segments in the first quarter.
The company’s snow segment disappointed in Q1, however, due to poor winter conditions and weaker than expected demand. That dragged Polaris’ overall power sports retail revenue down 10% from the same quarter of 2023. Excluding the snow segment, power sports sales were up 3%.
Polaris offered guidance that full-year 2024 sales are expected to be between 5% and 7% lower than in 2023. Diluted EPS is expected to be down 10% to 15% year-over-year. In response to the less-than-stellar April earnings release, PII has dropped 2.5% over the past month.
Will Polaris Stock Go Up?
The consensus among analysts is that Polaris stock will go up to $96.93 per share, representing a 16.8% increase from where the stock currently trades.
Though Wall Street analysts haven’t fully shied away from Polaris yet, they’re not quite ready to endorse it en masse either.
Out of 18 analysts who have evaluated the stock, only six rate it as a Buy. One of those analysts does believe PII will outperform the market over the next year, and that high estimate would result in PII jumping by 44.5% to $120 per share.
A single Sell rating exists while the lowest forecast predicts PII will fall by 9.65% to $75 per share over the next 12 months.
Polaris Has Eyes Set On Government Sector
The bulk of Polaris’s business is still in the off-road segment, so its a good indicator that North American ORV sales were up 3% from 2023.
Many of the company’s utility ORVs aren’t used for recreational purposes but they are an integral part of the farming and defense industries in many applications.
Polaris aims to expand its reach in the government and defense sector, and it recently announced the launch of two new militarized snowmobiles that are built to blend into their surroundings and perform in combat conditions.
A stable base of military and farming customers could be the cure for the company’s macroeconomic woes until demand turns around. But Polaris is still attracting new customers and the company reported 70% of first-quarter sales were from first-time Polaris buyers.
Another positive for Polaris is its powerful brand recognition, especially in North America. The company is the leader in off-road vehicles and in the marine segment, which includes pontoon and deck boats. Polaris holds second place in market share in the motorcycle and snow segments.
Is Polaris Stock Undervalued?
Despite the hold consensus, the average price target seems to indicate the stock is poised to bounce back. Polaris has a price-to-earnings multiple of 12x and a price-to-sales multiple of just 0.58x. Certainly, the P/S value seems like a powerful indicator that the stock is undervalued.
Polaris also rewards its shareholders; the company has consistently paid and increased its dividend for 29 years. The stock currently has a 3.2% annual dividend yield and pays out $0.66 per share each quarter.
After the prolonged downturn, investors might wonder if that long streak of payouts might be at a close. However, at the end of the first quarter, Polaris had $333.7 million in cash and cash equivalents. It looks like the company should be able to continue to reward PII holders.
Is Polaris Stock a Buy?
Polaris is the leader in motorsports vehicles and the company has a strong grip on market share in the boating, ORV, and snowmobile markets. The company has struggled as consumers have held off on buying leisure products due to economic conditions.
Many customers used stimulus checks to buy recreational vehicles, but that boom is over. As economic conditions clear and those vehicles start to show wear, Polaris may very well see a boost in sales.
Part of the reason for the dismal quarter was weather-related, and the company is working to expand its customer base to industries where its vehicles aren’t discretionary, such as the military segment.
Polaris stock is quite cheap by most valuations, and a 3% dividend yield makes the stock all that more attractive. If economic conditions clear, PII seems poised to take off again.
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