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.