Polaris' 2014 Earnings: Nothing Short Of Excellent
Summary
- Polaris’ culture of innovation served as a catalyst for robust fundamental expansion.
- Polaris saw special strength in its off-road, motorcycle, and parts, garments, and accessories segments in 2014.
- Polaris’ dividend is rock solid.
On Jan. 27, off road vehicle, ATV, mini vehicle and motorcycle maker and marketer Polaris (NYSE: NYSE:PII) came out with its 2014 earnings announcement. The company's fundamentals were actually excellent in addition to beating the Wall Street expectations game. Let's take a look to see how the company performed in 2014.
Excellent revenue and profitability gains
Last year Polaris saw its revenue, net income, and free cash flow increase 19%, 20%, and 35% respectively year-over-year. Off-road vehicles, motorcycles and its parts, garments & accessories segment had the most influence on Polaris's revenue expansion contributing 55%, 18% and 19% to the overall top line gains (see table below).
Polaris sales components | Years Ended 12/31/14 | Years Ended 12/31/13 | Gain | % of Overall Gain | YOY Gain |
Off-road vehicles | $2,909,020 | $2,521,559 | $387,461 | 55.1% | 15.4% |
Snowmobiles | $322,449 | $301,659 | $20,790 | 3.0% | 6.9% |
Motorcycles | $348,733 | $219,819 | $128,914 | 18.3% | 58.6% |
Small Vehicles | $157,379 | $122,765 | $34,614 | 4.9% | 28.2% |
Parts, Garments & Accessories | $742,067 | $611,266 | $130,801 | 18.6% | 21.4% |
Total Sales | $4,479,648 | $3,777,068 | $702,580 | 100.0% | 18.6% |
Source: Polaris's earnings announcement
One of the things I like about this company is its philosophy of innovation. Innovation is core to Polaris' corporate philosophy which is necessary in order to maintain consumer interest. The company added over 400 new accessories and two new Indian and one Victory model to its motorcycle product line. Excellent customer reception of the Indian Motorcycle has encouraged increased distribution of the product among dealers with a total of 175 dealers signed to sell the product in the future vs. the 118 already selling the product.
Polaris' lean cost control philosophy as well as leverage from its revenue gains served as foundations for its net income and free cash flow gains. Capital expenditures declined 19%, also contributing to year-over-year free cash flow gains.
Good balance sheet
Polaris sits on a good balance sheet. Its $138 million in cash and equivalents equates to 16% of stockholder's equity. That's not too bad. I like to see companies maintain a cash balance amounting to 20% or more of stockholder's equity to get them through difficult times. The company lowered its long-term debt balance 29% year-over-year. Polaris's long-term debt equates to 23% of stockholder's equity which is well below my personal threshold of 50%. Long-term debt creates interest which hinders profitability and eats into cash flow. In this case, Polaris's operating income exceeds interest expense by 64 times. The rule of thumb for safety lies at five times or more.
Dividend is sustainable
Polaris pays a very sustainable dividend. I measure dividend sustainability by comparing how much a company pays in dividends vs. its free cash flow. I like to see a company pay out less than 50% of its free cash flow and retain the rest for other purposes. In 2014, Polaris paid out 39% of its free cash flow in dividends. Currently, the company pays its shareholders $1.92 per share per year and yields 1.4% annually.
Looking ahead
Polaris is one of those companies that thrive during economic expansion as people with fat paychecks buy leisure items such as motorcycles and ATVs. If the economy tanks, then expect a steep correction in the company's stock price that exceeds the overall market. However, given Polaris' lean manufacturing culture and prudent financial management it should weather recessions relatively well for this type of company.
Despite excellent fundamentals and the recent run up in the company's stock price Polaris isn't exorbitantly overvalued, trading at a P/E ratio of 23 vs. 19 for the S&P 500 and 21 for Polaris' five year average according to Morningstar. The company is undervalued on a forward basis trading at a forward P/E ratio of 16 vs. 17 for the S&P 500. This company deserves a long-term spot in your portfolio.
This article was written by
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