Is Polaris Industries a buy after cutting this unprofitable company?

Polaris Industries (PII 0.57%) hasn’t done as badly as some in this era of runaway inflation and sky-high gas prices, with its stock down just 3% year-to-date compared to a 20% decline in the S&P500.

A drag on its performance in recent years, however, has been its cash-losing aftermarket Jeep and truck parts retail business. But with the decision to sell Transamerican Auto Parts to privately backed Wheel Pros, the company will focus more closely on its core powersports vehicle business. Does that make Polaris stock a buy?

Image source: Polaris Industries.

Tap

Transamerican Auto Parts (TAP) was Polaris Industries’ first foray into retail, and although something of an odd move at the time, there was a connection to its motorsports business because the company sold parts and accessories for ATVs and utility vehicles.

However, in the nearly six years since the acquisition, Polaris stock has only gained 32%, while the broad stock index is up almost 80%. Although it lagged for reasons other than the TAP acquisition, the retail business did nothing to improve its performance.

TAP accounted for the vast majority of Polaris’ aftermarket segment revenue, about 82% at the end of last year. But growth was always negligible or declining, and profitability was uncertain at best. Most of the sales and profit gains Polaris saw in the segment were the result of its other aftermarket businesses, brands that made parts, accessories and apparel for all-terrain vehicles, snowmobiles and motorcycles.

In the first quarter, powersports aftermarket sales climbed 16% while TAP sales fell 9% to $178 million, driving segment gross profit down 11% from last quarter. last year.

It became apparent to management that TAP needed to go, but while Polaris bought TAP for $665 million and it generated $760 million in revenue in 2021, it’s selling it for a whopping $50 million. dollars.

Lose extra weight

Selling aftermarket retail isn’t the first ancillary operation Polaris got rid of. It ditched the century-old fishing boat business of Larson Boats shortly after buying it in 2019, and it offloaded much of its utility vehicle business through the spin-off of its Global Electric Motorcars and Taylor-Dunn (another 2016 purchase) at Polaris. officers who run them as a separate, stand-alone corporation.

Polaris retained its pontoon and party boat operations as well as its Aixam and Goupil international utility vehicle businesses, and it intends to rely heavily on its remaining powersports vehicles.

Just before the utility vehicle split, Polaris announced a new electric sport UTV born out of its exclusive partnership with Zero Motorcycles, one of the nation’s leading electric motorcycle companies. The Ranger XP Kinetic features Zero’s muscular 110 horsepower (82 kilowatts) engine that delivers 140 foot-pounds of torque, which Polaris says makes it the most powerful utility side-by-side on the market.

Ready to light up

This is where Polaris Industries should have been all along, focusing on its powersports vehicles, where it is the biggest player in the industry.

It admits to losing market share in virtually every category in the first quarter, but that was mainly due to supply chain disruptions. CEO Mike Speetzen said Polaris will gain market share over the next several quarters, but for now it depends on which manufacturer is able to get its vehicles to customers as soon as possible.

This puts Polaris in a good position. As a leading manufacturer of powersports vehicles, once supply chain bottlenecks start to open up – and it looks like things are starting to ease – its manufacturing prowess and network of dealerships should allow it to dominate the market for all-terrain vehicles, snowmobiles, motorcycles and the growing segment of electric vehicles.

An industry leader at a discount

At 15x earnings, 10x next year estimates, less than 1x sales and Wall Street expects Polaris to grow earnings at a compound annual rate of 15% over the next five years, the action looks ready to hit the road.

Polaris Industries also relatively recently achieved the equivalent status of a dividend aristocrat, or S&P 500 stocks that have increased their payout for 25 years or more. It hit that milestone two years ago and its generous dividend of $2.56 per share is currently yielding 2.5% per year, helping to make this stock a buy. This is the one I intend to buy myself in the next week.

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