PII - Polaris: Positive Q2 Results Shares Fairly Valued

2023-07-26 07:37:56 ET

Summary

• Powersports leader, Polaris, reported a Q2 beat on both the top and bottom lines. Results were also accompanied by positive revisions to full-year sales guidance.
• In a positive reversal from Q1, the company reported strong North American retail sales, including 40%+ growth in their Indian Motorcycle brand.
• The company also gained market share in all three major units.
• Though the outlook appears positive, I view shares as fairly valued following a recent run-up to my previously estimated target price.

The rugged powersport offerings of Polaris ( PII ) appear better suited for the land than in the water. Fortunately for investors, the weakness in the Marine division hasn't impeded the company from gaining market share and outperforming the industry.

Polaris Q2 Earnings Summary

Total second quarter sales were up 7% to +$2.2B compared to last year and +$70M better than consensus . This was driven by strength in most facets of their business, including favorable shipping, product mix, and pricing.

In individual segments, strength was most significant in the On Road segment, with YOY growth of 21%. This follows growth of 42% in the prior quarter. Growth moderated to the high-single-digits in the Off Road ("ORV") unit and declined by double-digits in the Marine segment.

The moderation in the ORV unit was offset in part by double-digit sales of their Parts, Garments, and Accessories ("PG&A"). In Q1, sales of the products were flat.

And in the Marine segment, The YOY decline was consistent with industry-wide declines due to softer demand resulting from higher interest rates.

At 22.8%, gross margins were down slightly on an overall YOY basis but up 130 basis points ("bps") from Q1. The improvements were also reported in all segments. In On Road, margins grew to 22.6% from 17.8% in the same period last year and 21.4% last quarter.

Overall adjusted EPS came in at $2.42/share or $0.19/share better than consensus. Looking ahead sales guidance was favorably revised to reflect sales growth of 3% to 6%. This is up from previous guidance, which forecasted sales to be flat to up 5%. With the revision, EPS was revised at the low end of the range to down 2% versus down 3% previously.

Market Reaction To PII Q2 Results

Shares were muted immediately following the release and down slightly at the close of the trading day. The indifference follows a gain of nearly 15% over the past month and a gain of over 30% on a YTD basis. And since a prior update on the stock, where I rated shares as a "buy", PII has gained 14% compared to a 6.7% gain in the broader S&P ( SPY ) over the same period.

The outperformance has resulted in the stock trading at the upper end of their 52-week range at a forward multiple of just under 13.0x based on the midpoint of 2023 guidance range.

Key Takeaways Of PII Q2 Results

Significant Improvement In Retail Sales: In Q1, overall North American ("N.A.") retail was down 5%. PII turned this around in a big way in Q2, with N.A. retail growth of 14%.

The gains were most pronounced in their On Road segment, led by their Indian Motorcycle brand, which was up 40%+ YOY. This compares to the industry , which was up just low-single-digits. Retail sales also gained in ORV, with 14% growth compared to high-single-digit growth in the industry.

While YOY retail growth was impressive, it was less so relative to 2019. Overall N.A. retail was down 1% in 2019. But in Q1, it was up 14% to the same benchmark. The swing, therefore, could have been attributable to seasonality.

Continued Pontoon Weakness But Overall Share Gains In Marine: Consumers continue cooling on pontoons, which is impacting PII's Marine segment. In Q1, Pontoon N.A. retail was down in the low-30% range for PII. Performance wasn't much better in the overall industry, as sales were down in the high-20% range.

Some progress was made in Q2, but N.A. retail sales were down in the mid-single-digits for both PII and the industry. It's worth noting, too, that PII's 12-month rolling average market share is down approximately 1% to the industry. Offsetting this, however, is market share gains on an overall basis.

Positive Revisions To Guidance: Despite isolated weakness in Marine, PII still appeared to track ahead of target through the first half of the year. Market share gains across all three units, including Marine, is even more promising.

But it is the continued strength in their Indian Motorcycles that likely provided the confidence to raise full-year sales and EPS targets. In Q2, PII recorded record gross profit from sales of the motorcycles. The sales were also a record as a share of total unit sales.

The company boasts of having the strongest motorcycle portfolio in their history. Recent share gains and performance back up this assertion. In my view, I expect the unit to continue exhibiting company-wide outperformance, while it increasingly captures a greater share of overall sales.

Is PII Stock A Buy, Sell, Or Hold?

PII turned in a strong start to the first half of the fiscal year. This was led by notable strength in their On Road segment, which was boosted by outsized gains in their Indian Motorcycle offerings. I expect the unit to be a continuing driver of sales through the second half of the year. Seasonality, however, may negatively impact sales in the back half.

The improving trends in N.A. retail is also promising, as are continued share gains in all three of their units, including Marine, one segment that is being held back by sector-wide demand softness.

Share gains through the first half of the year have outperformed. And at current trading valuations, the stock is in-line with the target price that I had set in prior coverage. Current Wall Street targets, on the other hand, peg shares with 10% downside . A pullback in overall market sentiment or a significant deterioration in the consumer outlook could turn this into a reality.

For prospective investors, it may work out best to wait for a better buy-in as opposed to buying in at the current trading price, which, in my view, appears fairly valued.

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