Polaris Industries - Great Long-Term Investment, Has Seen Runaway Momentum In 2013

Oct. 7.13 | About: Polaris Industries (PII)

Shares of Polaris Industries (NYSE:PII) ended last week on a positive note. The manufacturer of off-road vehicles benefited from an upbeat research note from UBS.

I agree with UBS in the fact that both near and long term prospects look really good. That being said, I am a bit cautious for the short term prospects after the strong momentum so far this year, although I remain a long term fan of the stock.

Research Report

Analyst Robin Farley from UBS reiterated his buy rating on Polaris, while raising the price target from $121 to $142 per share.

According to the bank, channel checks indicate a strong response to the Indian brand as dealers have taken orders from buyers which sometimes have not even seen, or driven the motorcycles.

UBS believes that both management comments and channel checks indicate that Polaris is seeing supply constraints for its Indian brand. On the back of this, UBS sees no impact on 2013's earnings yet, but it does see upside for the 2014 outlook and beyond. UBS sees 15,000 shipped units in 2014 and another 21,000 units in 2015.

Valuation

Back in July, Polaris reported its second quarter results. The company ended the period with $217.7 million in cash and equivalents. Polaris holds $107.6 million in debt and capital lease obligations, for a net cash position of around $110 million.

Note that Polaris is scheduled to release its third quarter numbers on the 22nd of this month.

Revenues for the first six months of the year came in at $1.59 billion, up 13.0% on the year before. Net income rose by 19.7% to $155.5 million. At this pace revenues could come in around $3.6 billion. Polaris guided for earnings around $5.25 per share, or around $370 million.

Trading around $134 per share, the market values Polaris at $9.2 billion. This values operating assets at $9.1 billion, the equivalent of 2.5 times annual revenues and 24-25 times annual earnings.

Polaris pays a quarterly dividend of $0.42 per share, for an annual dividend yield of 1.2%.

Some Historical Perspective

Over the past five years, shares of Polaris have seen incredible momentum. Shares rose from merely $10 in 2009 to current highs around $134 per share. Note that so far in 2013 alone, shares have already risen some 60%.

Between the calendar year of 2009 and 2012, Polaris has more than doubled its annual revenues to $3.2 billion. Earnings more than tripled to $312 million in the meantime, as both revenues and earnings stand to increase significantly again this year.

Investment Thesis

Polaris continues to make great progress, after the company has shown significant revenue and earnings growth in recent years. Besides operating in a growing market, Polaris has been able to gain market share from the likes of Honda, Yamaha and Kawasaki.

Recently, Polaris reiterated its long term goals. The company sees 2020 revenues around $8.0 billion, representing a 12% compounded annual growth rate. This should be achieved by 5-8% organic growth, with another $2 billion revenue contribution from acquisitions. Net income should increase towards $850 million, as net profit margins should increase above the 10% mark.

The near term outlook remains solid as well, as management sees tremendous momentum in the second half of this year. This should be driven by the much anticipated re-launch of Indian Motorcycles after Polaris bought the brand in 2011.

Back in April of 2012, I last took a look at the prospects when shares were exchanging hands at $80 per share. In concluded that strong results and the long term outlook provided a strong driver behind the valuation. I noted that 20 times earnings was not very cheap, but that it was a fair valuation for a niche player with excellent operational execution.

In the meantime, shares have risen another 70% to $135, while the expected price-earnings multiple has increased from 20 to 24. Investors are really pleased with expected momentum in the second half of this year, and the solid outlook for 2020. Despite the very strong momentum so far this year, Polaris trades around 1.2 times 2020's revenues and 10-11 times earnings, leaving plenty of potential. Note that these goals are still some 7 years out ahead in time.

In this light the comments from UBS are fair. I am a true believer of the company given the great operational performance, and strong shareholder value creation in recent times. That being said, I wouldn't actively chase shares at these levels, after the strong momentum this year. I think this leaves shares a bit vulnerable to short-to-medium setbacks.

I remain on the sidelines with a long term bias to the upside.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.