Off-Road and powersports vehicle corporation Polaris (NYSE:PII) reported results ahead of analysts' expectations in Q4 FY2023, with revenue down 5.4% year on year to $2.29 billion. It made a GAAP profit of $1.81 per share, down from its profit of $3.34 per share in the same quarter last year.
Polaris (PII) Q4 FY2023 Highlights:
- Market Capitalization: $5.24 billion
- Revenue: $2.29 billion vs analyst estimates of $2.24 billion (2.2% beat)
- EPS: $1.81 vs analyst expectations of $2.51 (27.8% miss)
- EPS Guidance: 2024 EPS will be 10-15% below 2023 EPS (below Wall Street analysts' estimates)
- Free Cash Flow of $448.9 million is up from -$77.4 million in the previous quarter
- Gross Margin (GAAP): 20.8%, down from 24.3% in the same quarter last year
Founded in 1954, Polaris (NYSE:PII) designs and manufactures high-performance off-road vehicles, snowmobiles, and motorcycles.
Polaris was established to develop vehicles that could navigate the rugged landscapes of the Midwest. The company quickly made a name for itself with the introduction of the snowmobile, which opened up winter landscapes to new recreational possibilities.
Polaris stands at the forefront of the powersports industry, offering an extensive lineup of off-road vehicles, including ATVs, UTVs, and the Polaris RANGER®. Their motorcycles, under the Indian Motorcycle brand, and the Polaris Slingshot®, a three-wheeled roadster, complement the off-road range. While these vehicles are not for everyone, Polaris has identified its core market of adventurers and outdoor enthusiasts, who the company caters to with these unique and specialized products. These customers tend to be middle to higher income individuals who have extra disposable income to spend on a vehicle that is very unlikely to be their or their family's primary vehicle.
Polaris generates revenue through the sales of its vehicles, parts, garments, and accessories. It is supported by a network of dealerships and after-market services that not only make sales but serve a customer through the life of his/her vehicle, which deepens brand engagement. Those in search of a new Polaris vehicle or in need of services can find a dealership in many states across the US, spanning from the Northeast to the Southwest.
Leisure Facilities and Products
Consumers have lots of choices when it comes to how they spend their free time and extra money, so the companies offering leisure products and experiences must highlight their value proposition. Fitness companies may be riding the wellness trend, for example, while those selling recreational vehicles or toys may have to lean into innovation to stand out. Either way, all leisure companies must compete against the 800-pound gorilla of social media and streaming entertainment, which offer instant gratification and have been taking share of consumers’ free time for over a decade.Competitors in the outdoor sports industry include Vista Outdoor (NYSE:VSTO), Brunswick (NYSE:BC), and Malibu Boats (NASDAQ:MBUU).
A company’s long-term historical performance can give signals about its business quality. Any business can put up a good quarter or two, but many enduring ones muster years of growth. As you can see below, Polaris's annualized revenue growth rate of 6.5% over the last five years was mediocre for a consumer discretionary business. Within consumer discretionary, we’ve noticed product cycles are short and revenue can be hit-driven due to rapidly changing trends. This is why we also care about shorter-term performance. Polaris's two-year annualized revenue growth of 9.5% is above its five-year trend, suggesting there are bright spots within the company’s product portfolio.
This quarter, Polaris's revenue fell 5.4% year on year to $2.29 billion but beat Wall Street's estimates by 2.2%. Looking ahead, Wall Street expects revenue to decline 5.5% over the next 12 months, a deceleration from this quarter.
Operating margin is an important measure of profitability for consumer discretionary companies. Think of it as net income–the bottom line–excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
This quarter, Polaris generated an operating profit margin of 6.2%, down 4.4 percentage points year on year. This reduction indicates the company was less efficient with its expenses and had lower leverage on its fixed costs over the last year.Zooming out, Polaris has done a decent job managing its expenses over the last eight quarters. The company has produced an average operating margin of 8.4%, higher than the broader consumer discretionary sector. However, Polaris's margin has slightly declined by 1.5 percentage points on average each year. This shows the company has faced some small speed bumps along the way. Over the next 12 months, Wall Street expects Polaris to become less profitable. Analysts are expecting the company’s operating margin to decline by 1.2 percentage points.
We track long-term historical earnings per share (EPS) growth for the same reason as long-term revenue growth. Compared to revenue growth, however, EPS highlights whether a company's top-line growth was profitable.
Over the last five years, Polaris's EPS grew 41.8%, translating into an unimpressive 8.4% average annual growth rate. This growth, however, is higher than its 6.5% annualized revenue growth over the same period. There are a few reasons for this, and understanding why can shed light on its fundamentals. Polaris's operating margin and share count haven't improved over the last five years, meaning its EPS growth outpaced its revenue growth because it had a lower tax rate and interest expenses as a percentage of revenue. This is fine, but we put less emphasis on the results as they don’t tell us as much about business quality as operating profit margins and share buybacks.
In Q4, Polaris reported EPS at $1.81, down from $3.34 in the same quarter a year ago. This print unfortunately missed Wall Street's estimates, but we care more about long-term EPS growth rather than short-term movements. On the bright side, Wall Street expects the company to continue growing earnings over the next 12 months, with analysts projecting an average 2% year-on-year increase in EPS.
Cash Is King
Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can't use accounting profits to pay the bills.
Polaris's free cash flow came in at $448.9 million in Q4, up 59.2% year on year. This result represents a 19.6% margin.
Over the last eight quarters, Polaris has shown mediocre cash profitability, putting it in a pinch as it gives the company limited opportunities to reinvest, pay down debt, or return capital to shareholders. Its free cash flow margin has averaged 3.6%, subpar for a consumer discretionary business. However, its margin has averaged year-on-year increases of 3.4 percentage points. Continued momentum should improve its cash flow prospects. Analysts predict Polaris's free cash flow conversion will fall over the next four quarters. Their consensus estimates imply a 2.4 percentage point decrease in the company's free cash flow margin.
Return on Invested Capital (ROIC)
EPS growth informs us whether a company's revenue growth was profitable. But was it capital-efficient? For example, if two companies had the same EPS growth, we’d prefer the one putting up those numbers with lower capital requirements (usually in the form of balance sheet debt and equity).
Enter ROIC, a pivotal metric showing how much operating profit a company generates relative to the capital it's invested in the business. ROIC not only gauges a company's ability to grow profits but also sheds light on a management team's ability to allocate its limited resources.
Although Polaris hasn't been the highest-quality company lately, it historically did a wonderful job investing in profitable growth initiatives. Its five-year average ROIC was 26.5%, splendid for a consumer discretionary business. The trend in its ROIC, however, is often what surprises the market and drives the stock price. Unfortunately, Polaris's ROIC has averaged 1.6 percentage point decreases each year. This is a strike against the company and suggests its competitive advantage or profitable investment opportunities are shrinking.
Key Takeaways from Polaris's Q4 Results
It was good to see Polaris beat analysts' revenue expectations this quarter. That stood out as a positive in these results. However, its operating margin missed analysts' expectations and its EPS missed Wall Street's estimates. Management called out "unexpected operational challenges" and added that the company's end markets will "remain challenged in 2024". Guidance was also weak, as 2024 EPS will be 10-15% below this year's. Overall, the results could have been better. The stock is flat after reporting and currently trades at $92.73 per share.
Is Now The Time?
Polaris may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
We cheer for all companies serving consumers, but in the case of Polaris, we'll be cheering from the sidelines. Its revenue growth has been mediocre over the last five years, and analysts expect growth to deteriorate from here. On top of that, its forecasted free cash flow margin contraction over the next year suggests the company will be in a worse financial position, and its anticipated operating margin decline over the next year indicates its costs will rise in the near-term.
Polaris's price-to-earnings ratio based on the next 12 months is 10.5x. While the price is reasonable and there are some things to like about Polaris, we think there are better opportunities elsewhere in the market right now.
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