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Polaris Inc PII

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Morningstar’s Analysis

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Supply Chain Issues Lead to Constrained Full-Year Outlook at Wide-Moat Polaris; Shares Undervalued

Jaime M. Katz, CFA Senior Equity Analyst

Analyst Note

| Jaime M. Katz, CFA |

We plan to adjust our $173 fair value estimate for wide-moat Polaris down by a low-single-digit rate after incorporating third-quarter results and a tempered full-year outlook, but still view shares as undervalued. Third quarter sales were flat at $1.96 billion (below the 10% growth we modeled). While motorcycle sales rose 16%, global adjacent market sales jumped 37%, and boats sales increased 19%, the 6% decline in the ORV/snow segment (around 65% of annual revenues) provided a significant drag in the period as nearly finished goods inventory waited for shocks, plastics, semiconductors, and other inputs that were hijacked by the strangled global supply chain. Inflation added incremental downside to profits, as Polaris saw more than $100 million in higher costs during the period accounting for 580 basis points of cost pressure (the adjusted operating margin contracted 440 basis points, to 8.6%). With pain points not expected to abate in the near term, Polaris lowered its 2021 guidance to include 16% sales growth and $9 in EPS, below the 21% and $9.35 we projected, respectively.

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Company Profile

Business Description

Polaris designs and manufactures off-road vehicles, including all-terrain vehicles and side-by-side vehicles for recreational and utility purposes, snowmobiles, small vehicles, and on-road vehicles, including motorcycles, along with the related replacement parts, garments, and accessories. The firm entered the aftermarket parts segment in 2016, tying up with Transamerican Auto Parts and then tapped into boats through the acquisition on Boat Holdings in 2018, offering exposure to new segments of the outdoor lifestyle market. Polaris products retailed through 2,300 dealers in North America and through 1,400 international dealers as well as more than 30 subsidiaries and 90 distributors in more than 120 countries outside North America at the end of 2020.

2100 Highway 55
Medina, MN, 55340
T +1 763 542-0500
Sector Consumer Cyclical
Industry Recreational Vehicles
Most Recent Earnings Sep 30, 2021
Fiscal Year End Dec 31, 2020
Stock Type Cyclical
Employees 15,000