Polaris Industries, Inc. (NYSE:PII)

CAPS Rating: 5 out of 5

Designs, engineers and manufactures all terrain vehicles, snowmobiles, and motorcycles and markets them, together with related replacement parts, garments and accessories through dealers and distributors located in the United States, Canada and Europe.

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Member Avatar AnsgarJohn (98.18) Submitted: 1/15/2015 10:23:57 AM : Outperform Start Price: $139.43 PII Score: -5.01

I like the Indian motorcycle revival.

Detailed Analysis   Guru Score: 100%   Find Other Stocks that Pass This Guru
STAGE 1: "Is this a Buffett type company?"

A bedrock principle for Buffett is that his type of company has a "durable competitive advantage" as compared to being a "price competitive" or "commodity" type of business. Companies with a "durable competitive advantage" are more likely to be found in these sub-industries: Brand Name Fast Food Restaurants, Brand Name Beverages, Brand Name Foods, Brand Name Toiletries and Household Products, Brand Name Clothing, Brand Name Prescription Drugs, Advertising, Advertising Agencies, TV, Newspapers, Magazines, Direct Mail, Repetitive Services for Businesses, Low Cost Producers of Insurance, furniture, or Low Cost Retailers. While you should be easily able to explain where the company's pricing power comes from (i.e. a strong regional brand image, a business tollgate, its main products are #1 or # 2 in its field and has been on the market for years and hasn't changed at all, a consumer or business ends up buying the same product many times in a year, etc. or having the lowest production cost among its competition), there are certain figures that one can look at that can qualify the company as having a durable competitive advantage.

LOOK FOR EARNINGS PREDICTABILITY: [PASS]

Buffett likes companies to have solid, stable earnings that are continually expanding. This allows him to accurately predict future earnings. Annual earnings per share from earliest to most recent were 1.49, 1.57, 1.36, 1.55, 1.75, 1.53, 2.14, 3.20, 4.40, 5.40. Buffett would consider PII's earnings predictable, although earnings have declined 2 time(s) in the past seven years, with the most recent decline 5 years ago. The dips have totaled 25.9%. PII's long term historical EPS growth rate is 15.0%, based on the 10 year average EPS growth rate.

LOOK AT THE ABILITY TO PAY OFF DEBT [PASS]

Buffett likes companies that are conservatively financed. Nonetheless, he has invested in companies with large financing divisions and in firms with rather high levels of debt. PII has a debt of 225.2 million and earnings of 424.3 million, which could be used to pay off the debt in less than two years, which is considered exceptional.

LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON EQUITY: [PASS]

Buffett likes companies with above average return on equity of at least 15% or better, as this is an indicator that the company has a durable competitive advantage. US corporations have, on average, returned about 12% on equity over the last 30 years. The average ROE for PII, over the last ten years, is 41.0%, which is high enough to pass. It is not enough that the average be at least 15%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROE must be at least 10% for Buffett to feel comfortable that the ROE is consistent. In addition, the average ROE over the last 3 years must also exceed 15%. The ROE for the last 10 years, from earliest to latest, is 35.1%, 34.8%, 57.7%, 61.3%, 82.9%, 48.8%, 39.5%, 43.8%, 43.7%, 66.2%, and the average ROE over the last 3 years is 51.2%, thus passing this criterion.

LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON TOTAL CAPITAL: [PASS]

Because some companies can be financed with debt that is many times their equity, they can show a consistently high ROE, yet still be in unattractive price competitive businesses. To screen this out, for non-financial companies Buffett also requires that the average Return On Total Capital (ROTC) be at least 12% and consistent. In addition, the average ROTC over the last 3 years must also exceed 12%. Return On Total Capital is defined as the net earnings of the business divided by the total capital in the business, both equity and debt. The average ROTC for PII, over the last ten years, is 32.5% and the average ROTC over the past 3 years is 39.2%, which is high enough to pass. It is not enough that the average be at least 12%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROTC must be at least 9% for Buffett to feel comfortable that the ROTC is consistent. The ROTC for the last 10 years, from earliest to latest, is 33.5%, 33.2%, 23.1%, 28.4%, 33.7%, 24.7%, 31.1%, 36.3%, 38.0%, 43.2%, thus passing this criterion.

LOOK AT CAPITAL EXPENDITURES: [PASS]

Buffett likes companies that do not have major capital expenditures. That is, he looks for companies that do not need to spend a ton of money on major upgrades of plant and equipment or on research and development to stay competitive. PII's free cash flow per share of $1.80 is positive, indicating that the company is generating more cash that it is consuming. This is a favorable sign, and so the company passes this criterion.

LOOK AT MANAGEMENT'S USE OF RETAINED EARNINGS: [PASS]

Buffett likes to see if management has spent retained earnings in a way that benefits shareholders. To figure this out, Buffett takes the total amount of retained earnings over the previous ten years of $15.73 and compares it to the gain in EPS over the same period of $3.91. PII's management has proven it can earn shareholders a 24.9% return on the earnings they kept. This return is more than acceptable to Buffett. Essentially, management is doing a great job putting the retained earnings to work.

HAS THE COMPANY BEEN BUYING BACK SHARES: [BONUS PASS]

Buffett likes to see falling shares outstanding, which indicates that the company has been repurchasing shares. This indicates that management has been using excess capital to increase shareholder value. PII's shares outstanding have fallen over the past three years from 68,430,000 to 68,000,000, thus passing this criterion. This is a bonus criterion and will not adversely affect the ability of a stock to pass the strategy as a whole if it is failed.

The preceding concludes Buffett's qualitative analysis. If and when he gets positive responses to all the above criteria, he would then proceed with a price analysis. The price analysis will determine whether or not the stock should be bought. The following is how he would evaluate PII quantitatively.

STAGE 2: "Should I buy at this price?" Although a firm may be a Buffett type company, he won't invest in it unless he can get a favorable price that allows him a great long term return.

CALCULATE THE INITIAL RATE OF RETURN: [No Pass/Fail]

Buffett compares his type of stocks to bonds, and likes to see what a company's initial rate of return is. To calculate the initial rate of return, take the trailing 12-month EPS of $6.24 and divide it by the current market price of $140.90. An investor, purchasing PII, could expect to receive a 4.43% initial rate of return. Furthermore, he or she could expect the rate to increase 15.0% per year, based on the 10 year average EPS growth rate, as this is how fast earnings are growing.

COMPARE THE INITIAL RATE OF RETURN WITH THE LONG-TERM TREASURY YIELD: [PASS]

Buffett favors companies in which the initial rate of return is around the long-term treasury yield. Nonetheless, he has invested in companies with low initial rates of return, as long as the yield is expected to expand rapidly. Currently, the long-term treasury yield is about 2.75%. Compare this with PII's initial yield of 4.43%, which will expand at an annual rate of 15.0%, based on the 10 year average EPS growth rate. The company is the better choice, as the initial rate of return is close to or above the long term bond yield and is expanding.

CALCULATE THE FUTURE EPS: [No Pass/Fail]

PII currently has a book value of $12.39. It is safe to say that if PII can preserve its average rate of return on equity of 41.0% and continues to retain 65.62% of its earnings, it will be able to sustain an earnings growth rate of 26.9% and it will have a book value of $133.92 in ten years. If it can still earn 41.0% on equity in ten years, then expected EPS will be $54.84.

CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail]

Now take the expected future EPS of $54.84 and multiply them by the lower of the 5 year average P/E ratio or current P/E ratio (22.6) (5 year average P/E in this case), which is 20.8 and you get PII's projected future stock price of $1,140.11.

CALCULATE THE EXPECTED RATE OF RETURN BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail]

Now add in the total expected dividend pool to be paid over the next ten years, which is $50.21. This gives you a total dollar amount of $1,190.31. These numbers indicate that one could expect to make a 23.8% average annual return on PII's stock at the present time. Buffett would consider this an absolutely fantastic expected return.

CALCULATE THE EXPECTED FUTURE STOCK PRICE BASED ON AVERAGE EPS GROWTH: [No Pass/Fail]

If you take the EPS growth of 15.0%, based on the 10 year average EPS growth rate, you can project EPS in ten years to be $25.34. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio or current P/E ratio (22.6) (5 year average P/E in this case), which is 20.8. This equals the future stock price of $526.72. Add in the total expected dividend pool of $50.21 to get a total dollar amount of $576.93.

CALCULATE THE EXPECTED RETURN USING THE AVERAGE EPS GROWTH METHOD: [No Pass/Fail]

Now you can figure out your expected return based on a current price of $140.90 and the future expected stock price, including the dividend pool, of $576.93. If you were to invest in PII at this time, you could expect a 15.14% average annual return on your money. B

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Member Avatar rollotherichkid (< 20) Submitted: 1/14/2015 1:08:31 PM : Outperform Start Price: $139.43 PII Score: -5.37

Very active in the sports vehicle market. Constant new and innovative products.

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Member Avatar MightyMinnow (23.18) Submitted: 12/24/2014 9:10:15 AM : Underperform Start Price: $149.52 PII Score: +7.60

sough sledding

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Member Avatar HOGridin (75.80) Submitted: 12/23/2014 7:33:24 PM : Outperform Start Price: $149.52 PII Score: -7.60

WIth adding Indian, Harley may finally feel some pressure from this other American manufacturer. Polaris other businesses are strong.

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Member Avatar SCOTTRHUETTLCPA (66.57) Submitted: 9/26/2014 2:04:46 PM : Underperform Start Price: $150.65 PII Score: +13.44

failed breakouts uptrend under pressure

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Member Avatar IanERichards (81.13) Submitted: 6/4/2014 7:31:25 AM : Outperform Start Price: $125.12 PII Score: +2.17

Top class management

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Member Avatar phoenixseangels (34.32) Submitted: 5/28/2014 10:10:44 PM : Outperform Start Price: $129.58 PII Score: -1.92

building toys for grown ups by adreniline junkies.

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Member Avatar hba24 (94.13) Submitted: 5/28/2014 10:19:05 AM : Outperform Start Price: $129.44 PII Score: -2.12

Leader in off-road vehicles with a good track record of innovation.

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Member Avatar aymo0003 (< 20) Submitted: 5/1/2014 11:02:23 PM : Outperform Start Price: $134.55 PII Score: -7.80

Profitable growth

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Member Avatar DocRiggs (54.17) Submitted: 4/2/2014 2:21:46 PM : Outperform Start Price: $140.62 PII Score: -11.98

MF One

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Member Avatar BUbulldog (69.01) Submitted: 3/10/2014 10:06:07 AM : Outperform Start Price: $136.23 PII Score: -9.25

Snow = snowmobile sales. We had a lot of snow. That's as insightful as I will get.

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Member Avatar StewpotDrew (27.28) Submitted: 2/3/2014 12:07:13 AM : Outperform Start Price: $123.31 PII Score: -4.93

Business run well. Creative management. New products. I'd like to smoke a peace pipe with the Indian.

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Member Avatar benpop318 (< 20) Submitted: 1/30/2014 1:51:35 PM : Outperform Start Price: $126.35 PII Score: -6.66

The company has great product innovation and management.

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Member Avatar happygigging (< 20) Submitted: 1/22/2014 10:50:31 AM : Outperform Start Price: $136.16 PII Score: -11.55

More acquisitions in related products are increasing sales.

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Member Avatar bigstylianos (72.55) Submitted: 1/14/2014 7:12:59 AM : Outperform Start Price: $137.07 PII Score: -13.28

The new Indian motorcycle range is a winner for polaris

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Member Avatar gypsystem (35.01) Submitted: 1/11/2014 12:47:38 AM : Outperform Start Price: $141.69 PII Score: -15.62

Motorcycle division should do well. Looks like there's lots of room for growth.

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Member Avatar TMFPencils (99.82) Submitted: 12/26/2013 2:05:46 AM : Outperform Start Price: $141.15 PII Score: -15.47

There are a lot of things to like with Polaris. My brother and brother-in-law, both of whom are interested in motorcycles and vehicles of all sorts, have much respect for the Polaris brand. The brand power of Polaris is significant and gives the company a competitive edge over the long run.

Not to mention some other positive developments:

Improving margins, cash outweighs debt more than 3-to-1, and the business is a strong cash flow generator. An experienced and innovative management team just sweetens the deal.

Although the stock is gracing all-time highs, the fact is that Polaris has the financial performance and long-term prospects to back up a P/E ratio of 28.

The bottom line: this strikes me as a quality business with a respectable following and brand power, impressive financial performance, and an innovative management team. If that isn't a recipe for a long-term market outperform, I don't know what is.

In the short-term, anything can happen. I'm not one for timing the market (some of my worst CAPS picks can confirm this). In the long run, business fundamentals are what count. Polaris has a strong business that should lead to market-beating returns over the next 5+ years.

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Member Avatar mark1969ABC (82.13) Submitted: 12/23/2013 10:39:05 PM : Outperform Start Price: $141.45 PII Score: -16.17

growth company

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Member Avatar GVFool15 (83.33) Submitted: 12/21/2013 1:52:45 AM : Outperform Start Price: $140.13 PII Score: -15.34

Top innovator in the off road vehicle market. Hold for 5+ years!

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Member Avatar investorpoet2 (94.03) Submitted: 12/6/2013 10:17:46 AM : Outperform Start Price: $134.78 PII Score: -12.69

Sales have grown by over 12% over the past 5 years. Net income has grown by over 22% during the past five years. Return on equity has been over 40% for the past five years and return on capital has been over 30% for the past five years. The company has performed very well, and the economy is just getting going.

Looking ahead, analysts project EPS growth of almost 17% for the next five years. Given their returns previously, this may be conservative. All their brands are growing faster than this except for their motorcycles, and those have been redesigned and have gotten good reviews.

Starting with this year's projected EPS of $5.39/share and growing earnings by 16% gets $24/share in earnings in 10 years. Assuming a P/E of 32, shares would be worth $760 or so. Discounted back at 15% gets me an intrinsic value of $190. At around $136 today, I'm getting a 28% discount. Not a bad deal. This should outperform the market for years.

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