Polaris Industries, Inc. (NYSE:PII)

CAPS Rating: 4 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 kkconway (99.32) Submitted: 10/1/2015 1:30:02 PM : Outperform Start Price: $116.56 PII Score: -1.84

Oversold dramatically in midst of general market anxiety. Great time to buy.


Member Avatar Langtima (38.73) Submitted: 10/1/2015 1:05:15 PM : Outperform Start Price: $116.43 PII Score: -1.95

This is a well managed business. They have gone through some growing pains but I believe that improving operations can benefit the bottom line (think paint facility start-up).

The company has demonstrated its ability to launch successful new categories (think Slingshot) while revitalizing old brands (think Indian Motorcycles). I believe that the boomer generation, which is healthier and more active in retirement than previous generations, is looking for adventure and travel, and have the money to indulge in the activities (such as recreational vehicles) that they may have missed out on as they raised their children. I also think that this generation is placing increased value on spending time recreationally with their children and grandchildren, and I can see snowmobile and ATV sales benefiting from these (non-technology/quality time) recreational purchases, including gear.


Member Avatar notyouagain (52.69) Submitted: 9/11/2015 1:56:14 AM : Outperform Start Price: $127.99 PII Score: -8.85

Beginning start price $127.99

To begin with, I don't know anything about motorcycles or 4-wheelers. I don't own either. That doesn't keep me from looking at the numbers for this company and discerning long-term performance that had to be driven by a competitive advantage far and away above the competition.

A person might have paid $50 per share for PII in mid-December 2005, having watched the annual dividend climb from $0.22 in 2000 to $0.56 in 2005...a 5-year average dividend growth rate of 20.55%.

His current yield based on the 2005 $0.56/share annual dividend would have been 1.12%. That $0.56 annual dividend required only 32.2% of the 2005 earnings/share of $1.64. Return on equity that year was 39%, meaning each dollar of shareholder equity generated $0.39 in net income.

Since then, that dividend has swelled from that $0.56/share in 2005 to $2.12...for a 10-year average dividend growth rate of 14.24%. That $0.56 dividend has grown a total of 278% in 10 years...and currently requires only 30% of earnings.

Those earnings have grown an average of over 15% a year since 2005...from $1.64 in 2005 to $6.65 in 2014. That's a total of over 300%. They've more than tripled.

................................so....will it continue?.....................

PII's revenue has grown from $1,870M in 2005 to $4,735M in the trailing twelve months, for an average annual revenue growth rate of $9.74%.

It's not so much their margins that are slaying the industry. Their net margin was 7.66% in 2005. In 2014 it was over 10% and in the trailing twelve months it was 9.84%.
That's a pretty good difference but it's not so much bigger than the industry average of 8.92%.

Return on assets (Net Income/Assets) for the trailing twelve months is 21.3%. The industry average is half that at 10.1%.

Return on assets can be broken down further, to (Revenue/Assets) X (Net Income/Revenue).

The first (Revenue/Assets) is Asset Turnover. The second one is Net Margin. So it all just boils down to the fact that their sales are blowing away the competition.

By adding a third component (Assets/Equity) we figure in financial leverage.

(Revenue/Assets) X (Net Income/Revenue) X (Assets/Equity) = Return on equity.

PII's string of nearly 10 years with returns on equity in excess of 50% (including 3 years over 60% and 1 year @ 75%) have played a huge role in its fantastic growth in earnings, book value (shareholders' equity), and its ability to fund new growth while avoiding excess debt.

This company's interest coverage is 64.5. PII earns $64.50 for every dollar in interest expense it pays.

A high return on equity is indicative of a probable competitive advantage at work. While high profit margins are also a sign of a probable competitive advantage, profit margins relate profits to sales. Return on equity relates profit to the amount of equity required to earn it.

A higher return on equity makes it cheaper to fund business growth while leaving more money available for dividend growth and share repurchases.

This company had 88M shares outstanding in 2005. Today it has 68M shares outstanding...a reduction of 22.73%.

Companies without a durable competitive advantage have a hard time keeping their Selling, General, & Administrative Expenses in line. Management salaries, advertising and travel costs, payroll costs...there's no "right" number, because there's great variation among different businesses and industries. The lower the better, but consistency is important. Companies lacking a durable competitive advantage suffer intense competition and show wide swings in SGA costs as a percent of gross profit. Sales start to fall but SGA costs remain to diminish more and more of the company's gross profits.

PII's SGA costs are consistently between 35% and 40% of gross profit.

Looking over the last 10 years of capital expenditures as a percent of net income, PII spent an average of 49% of its net income on capital expenditures over the last 10 years. But over the last 5 or 6 years, capex only once exceeded 40% of net income. As it gained in dominance, perhaps it didn't need to spend as much.

A strong competitive advantage often allows a company to spend less on capex.

PII has a quick ratio of only 0.40 and a current ratio of 1.60.

This means nothing. Many companies with durable competitive advantages often have current ratios even below 1.0.
Conventional wisdom would indicate that this means they might have trouble paying their current liabilities. But what's actually going on is that their earning power is so strong they can easily cover their current liabilities.

Their tremendous earning power allows them to pay generous dividends and repurchase shares, both of which diminish cash reserves and help pull their current ratios below one. But the consistency of their earning power that having a durable competitive advantage gives them ensures they can cover their current liabilities. Also as a result of their tremendous earning power, these companies have no problem accessing more cash via the cheap, short-term commercial paper market should they need to.

PII has, according to DividendInvestor.com, increased its dividend for 18 consecutive years. The last 5 years average dividend growth rate has been over 22%. PII has increased its dividend at a clip of 14.24% for the last 10 years...and its payout ratio is lower now than it was then.

What lies ahead? Well, it has a return on equity of 58.98% over the trailing twelve months. Of course, that doesn't mean PII could retain all earnings and grow at the rate of its ROE in perpetuity. If it did, PII would be taking over the world in a decade or two.

But since PII pays a dividend, its *sustainable growth rate* is less than 58.98%. *Sustainable Growth Rate* is: (1 - the payout ratio) X Return On Equity. PII can lower its sustainable growth rate to a much more realistic figure by a combination of dividend payments and share repurchases.

PII has a 30% payout ratio. (1 - 30%) X 58.98% suggests a "sustainable growth rate" of 41%. This suggests that PII could almost triple in size every 3 years. This isn't realistic either. So the amount of retained earnings that exceed the amount that can be reinvested in the business with any realistic expectation of producing an adequate return typically go into share repurchases to provide for a realistic rate of growth at a high return on equity.

I believe PII will provide high returns for many more years. Above market returns. Heck, the financial crisis barely cramped its style. It barely slowed its dividend growth rate during the financial crisis. I might even be tempted to guess that in 5 years perhaps $300 will be the *low* end of the range PII will be fluctuating in. Or higher.

At any rate, I'm betting whether 5 years or 10 years down the road, the return from PII will have turned out to be more than adequate.

P.S. I have more. Maybe I'll write more later in another comment or two. I'm just tired for now. I'd like to give great props to two books.

"Warren Buffet And The Interpretation Of Financial Statements" by Mary Buffet and David Clark
"The Ultimate Dividend Playbook" by Josh Peters


Member Avatar AnsgarJohn (98.92) Submitted: 9/7/2015 11:49:13 AM : Outperform Start Price: $132.45 PII Score: -11.33

Nice dip. Polaris . Like the Indian brand motorcycles.

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.


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 1.57, 1.36, 1.55, 1.75, 1.53, 2.14, 3.20, 4.40, 5.40, 6.65. Buffett would consider PII's earnings predictable, although earnings have declined 2 time(s) in the past seven years, with the most recent decline 6 years ago. The dips have totaled 25.9%. PII's long term historical EPS growth rate is 16.1%, based on the 10 year average EPS growth rate.


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 398.5 million and earnings of 463.8 million, which could be used to pay off the debt in less than two years, which is considered exceptional.


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 42.1%, 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 34.8%, 57.7%, 61.3%, 82.9%, 48.8%, 39.5%, 43.8%, 43.7%, 66.2%, 51.2%, and the average ROE over the last 3 years is 53.7%, thus passing this criterion.


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 33.2% and the average ROTC over the past 3 years is 40.6%, 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 33.2%, 23.1%, 28.4%, 33.7%, 24.7%, 31.1%, 36.3%, 38.0%, 43.2%, 40.7%, thus passing this criterion.


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 $2.89 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.


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 $19.61 and compares it to the gain in EPS over the same period of $5.08. PII's management has proven it can earn shareholders a 25.9% 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.


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 five years from 68,470,001 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.


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 $6.82 and divide it by the current market price of $130.15. An investor, purchasing PII, could expect to receive a 5.24% initial rate of return. Furthermore, he or she could expect the rate to increase 16.1% per year, based on the 10 year average EPS growth rate, as this is how fast earnings are growing.


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 3.15%. Compare this with PII's initial yield of 5.24%, which will expand at an annual rate of 16.1%, 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.


PII currently has a book value of $13.38. It is safe to say that if PII can preserve its average rate of return on equity of 42.1% and continues to retain 67.44% of its earnings, it will be able to sustain an earnings growth rate of 28.4% and it will have a book value of $162.97 in ten years. If it can still earn 42.1% on equity in ten years, then expected EPS will be $68.64.


Now take the expected future EPS of $68.64 and multiply them by the lower of the 5 year average P/E ratio (21.8) or current P/E ratio (current P/E in this case), which is 19.1 and you get PII's projected future stock price of $1,308.91.


Now add in the total expected dividend pool to be paid over the next ten years, which is $55.35. This gives you a total dollar amount of $1,364.26. These numbers indicate that one could expect to make a 26.5% average annual return on PII's stock at the present time. Buffett would consider this an absolutely fantastic expected return.


If you take the EPS growth of 16.1%, based on the 10 year average EPS growth rate, you can project EPS in ten years to be $30.44. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio (21.8) or current P/E ratio (current P/E in this case), which is 19.1. This equals the future stock price of $580.46. Add in the total expected dividend pool of $55.35 to get a total dollar amount of $635.80.


Now you can figure out your expected return based on a current price of $130.15 and the future expected stock price, including the dividend pool, of $635.80. If you were to invest in PII at this time, you could expect a 17.19% average annual return on your money.


Member Avatar Kidkerner (57.20) Submitted: 8/1/2015 8:49:37 AM : Outperform Start Price: $136.49 PII Score: -6.95

Basing and will soon break through 50, 200 dma to new all-time highs.



Member Avatar PhilDec (< 20) Submitted: 6/11/2015 1:09:06 PM : Outperform Start Price: $144.50 PII Score: -11.38

Innovative products w solid engineering has avoided many of the hiccups seen in this industry. Require dealers to upgrade to carry new lines. Products across many interests.


Member Avatar TMFCavalier (50.43) Submitted: 6/5/2015 10:44:16 AM : Outperform Start Price: $142.35 PII Score: -11.69

This producer of off-road vehicles, motorcycles, and snowmobiles is truly an extraordinary business. The company's mantra - "Understand the riding experience. Live the riding experience. Work to make it better." - helps to encompass what the company is all about. They are market leaders in their off-road vehicles (ATVs, side-by-sides) and are rapidly taking market share in motorcycles with the re-launch of the Indian brand. The company knows what customers want and works exceptionally efficiently to deliver these vehicles. Return on invested capital in 2014 was a whopping 42% compared to their peers' average of 14%. Return on equity was over 50% and net income margin was right at 10% this last year. These are outstanding figures for any company, let alone a manufacturer.

And there is still plenty of room for Polaris to grow. Only 15% of sales come outside of the U.S. and Canada - management thinks they can get this to at least 30% by 2020. Even in the U.S., only 2% of U.S. households have a Polaris off-road vehicle. Management wants to get this figure to 5%. In all, management wants to get revenue of $8 billion by 2020, which would imply 12% growth in revenue a year. Management has a history of beating the goals they've set for themselves so don't be surprised to see them reach this goal ahead of schedule.


Member Avatar magconpres (54.46) Submitted: 5/19/2015 11:25:06 PM : Outperform Start Price: $140.80 PII Score: -8.46

solid fundamentals. Great Prodoob (yea!! a choice in American motorcycles). Earnings Growth.


Member Avatar TMFBuck (90.89) Submitted: 4/23/2015 11:04:28 AM : Outperform Start Price: $144.04 PII Score: -11.50

Wow, how did I miss this great performer? Well I'm getting it on the list now.


Member Avatar watchee (42.63) Submitted: 4/6/2015 12:48:34 PM : Outperform Start Price: $140.74 PII Score: -10.62



Member Avatar Golfer1 (< 20) Submitted: 3/10/2015 12:02:24 PM : Underperform Start Price: $145.99 PII Score: +15.02

Polaris will continue to fall until it releases its new product line for next year, as we see they haven't released anything particularly appealing to the general public in the past year. When they release the 2016 line, the stock will rise back up.


Member Avatar CantonTownship (< 20) Submitted: 3/4/2015 2:28:56 PM : Outperform Start Price: $151.85 PII Score: -16.06

WOW, Texas!


Member Avatar HOGridin (65.19) Submitted: 2/4/2015 12:35:27 PM : Outperform Start Price: $144.51 PII Score: -14.74

Indian has impressive new models to yank at Harley customer, Victory for less traditional ones. The new three wheeler will also generate new business. But temper enthusiasm...the competitiveness of this new American motorcycle market could erode margins.


Member Avatar rollotherichkid (< 20) Submitted: 1/14/2015 1:08:31 PM : Outperform Start Price: $137.89 PII Score: -13.24

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


Member Avatar IanERichards (63.85) Submitted: 6/4/2014 7:31:25 AM : Outperform Start Price: $123.74 PII Score: -6.75

Top class management


Member Avatar phoenixseangels (44.13) Submitted: 5/28/2014 10:10:44 PM : Outperform Start Price: $128.15 PII Score: -10.45

building toys for grown ups by adreniline junkies.


Member Avatar hba24 (91.00) Submitted: 5/28/2014 10:19:05 AM : Outperform Start Price: $128.01 PII Score: -10.66

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


Member Avatar aymo0003 (< 20) Submitted: 5/1/2014 11:02:23 PM : Outperform Start Price: $133.06 PII Score: -15.91

Profitable growth


Member Avatar DocRiggs (63.76) Submitted: 4/2/2014 2:21:46 PM : Outperform Start Price: $139.07 PII Score: -19.66

MF One


Member Avatar StewpotDrew (27.20) Submitted: 2/3/2014 12:07:13 AM : Outperform Start Price: $121.95 PII Score: -13.84

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

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