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8/11/2019 Polaris (PII-NYSE)
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Research ReporAug 28th, 20
Page 1 of 30
Company: PII ($110.81 - US)Sector: Consumer Discretionary Topic: Investment Report
Recommendation: Hold
Zeeshan Maqsoo
Zeeshan.maqsood@Mail .mcgi l l .
Polaris Industries I PII T 28-Aug-13
Price U/D
Date 28-août-13 86.56 (21.5%)
Price 110.26 USD Mkt Cap FY1 Rev USD = 1 USD 83.97 (23.8%)
Market Cap 7,802,218 7,802,218 3,699,005 1.0000
Total Debt 107,601 USD = 1 USD déc-14 U/D
Total Cash 217,674 1.0000 TP High 119.21 7.2%
Net Cash Per Share 1.56 1.4% TP Low 67.79 (29.0%)
Enterprise Value 7,692,145 AVG TP 99.56 (6.1%)
S/O Diluted 70,762 TP 99.56 (6.1%)
Insider Ownership 7.0% déc-16
Net Burn Rate (0.4%) TP High 147.99 10.4%
TP Low 87.97 (4.9%)
LTM AVG TP 125.05 5.1%
Jul-13 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 TP 125.05 5.1%
Revenues 3,371,295 3,209,782 3,711,039 4,006,855 4,219,900 82.02 (25.6%)
Rev. Growth 14.6% 20.8% 15.6% 8.0% 5.3% 96.05 (12.9%)
EBIT Margin 16.0% 16.2% 15.8% 16.7% 17.0%
EBITDA Margin 18.0% 16.0% 17.8% 18.7% 19.0% Upside 113.10 5.8%
Net Profit Margin 11.5% 11.3% 11.3% 11.8% 12.1% Downside 72.16 (34.6%)
EPS Adj. (Diluted) 5.46 5.10 5.99 6.90 7.61 π U/D Ratio 0.17
NOPAT 361,388 338,810 381,968 435,849 469,370
NOPAT/Shr 5.10 4.77 5.47 6.37 6.98 Days/Vol 0.0 $77.9M /Da
FCF (Oper, ex. NWC) 65,964 250,702 401,706 472,351 516,465 US 2.0% 0
FCFPS (Operating) 0.93 3.53 5.75 6.91 7.68 EAFE 0.0% 0
CAPEX 4.6% 3.2% 3.1% 2.6% 2.4% Global 1.0% 0
Debt-to-NOPAT (0.3x) (0.9x) (1.1x) (1.6x) (2.2x)
Debt-to-EBITDA (0.5x) (0.6x) (0.6x) (0.9x) (1.3x) Financials FX: USD
ROE 62.7% 52.5% 49.0% 43.9% 36.3% Stock Price FX: USD
ROIC 151.8% 122.4% 118.0% 130.7% 138.8%
Dividend Yield 1.4% 1.3% 1.6% 1.6% 1.6%Multiples @ $110.26 TTM NTM Dec-13 Dec-14 Dec-15 High Low AVG
P/E 20.2x 17.2x 18.4x 16.0x 14.5x 17.5x 11.1x 14.3x
EV/NOPAT 21.3x 18.4x 20.1x 17.6x 16.4x 17.1x 9.0x 14.0x
EV/NOPAT (Incl. Financing) 19.9x 17.3x 18.7x 16.4x 15.2x
EV/FCF 116.6x 17.2x 19.1x 16.3x 14.9x 18.8x 10.1x 14.4x
Fair MultiplesEV/NOPAT 14.0x 14.0x 14.0xEV/FCF N/A N/A N/A
10-Yr Cash Distribution FCFF CFO CAGR 10 Yr 5 Yr 3-Yr Est.
Dividend (33.2%) (22.8%) Rev 7.8% 12.5% 9.5% Organic Δ 3.1%
Buyback (68.3%) (46.9%) EBIT (Adj.) 14.2% 28.9% 11.4% ROIC 67.8%
Acquisitions (6.2%) (4.2%) NOPAT 13.8% 28.5% 11.5% Incr. ROIC (502.1%)
Debt 4.7% 3.2% EPS Adj. 16.6% 25.5% 14.3%
CAPEX (31.2%) S/O Dil. (2.8%) (0.5%) (1.8%)Stock Issuance 15.0% 10.3%
Misc. 9.1% 6.3% Consensus Revisions
Divestitures 0.0% 0.0% Revenues EPS
Accumulated cash (21.2%) (14.6%) FY1 15.5% 18.1%
Total (100.0%) (100.0%) FY2 39.7% 40.6%
Valuation @ $110.26
Forecast
Buy Target
Value
USD DCF/Shr
Sell Target
Upside/Downside
DCF
Target Prices
Liquidity
7-Year Figures
Disclaimer: All statements and expressions are the sole opinion of the editor and are subject to change without notice. The informatiocontained herein has been provided as an information service only. The accuracy or completeness of the information is not warranted anis only as reliable as the sources from which it was obtained.The documents attached thereto, are intended only for the addressee anmay contain privileged or confidential information. Any unauthorized disclosure is strictly prohibited.
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Research ReporAug 28th, 20
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Executive Summary:Polaris operates in the powersports industry:
Source: UBS Securities
o #1 Marketshare in overall powersports units sold, and #1 or #2 in individual segments:SxS ATV Total ORV (70% of Sales) Motorcycle Snowmobile
Number 1 Polaris (>40%) Polaris (30%) Polaris (36%) Harley (`>55%) BRP (39%)Number 2 Deere (11%) Honda (27%) Honda (18%) Polaris (5%) Polaris (26%)
Source: Company Reports, SunTrust Robinson Humphrey, 2013
o Sales summary:
Investment Thesis: Positives
o Extremely well run company (High ROIC >40%)o Strong category leader in the powersports industryo Several call options on large growth opportunitieso Innovation led companyo Strong management & corporate governanceo Little debt (Debt/EBITDA ~0.2x)o Fairly Valued
Negativeso No pricing power o Short product cycles o Discretionary / cyclical o Weak porter score o Risk that SxS becomes more competitive as competition catches up
Breakdown of Sales Increases Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 5y avg.
Volume 2% -2% -29% 21% 24% 18% 5.7%
Product mix and price 3% 11% 10% 4% 7% 4% 6.5%
CC Growth 5% 9% -19% 25% 31% 22% 12.2%
Currency 2% 0% -1% 2% 2% -1% 0.7%
Total 7% 9% -20% 27% 33% 21% 12.8%
Geography Sales Breakdown Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 5y CAGR
United States 70% 70% 69% 71% 70% 72% 13.0%
Canada 14% 14% 15% 14% 14% 14% 11.9%
Foreign Countries 16% 16% 16% 15% 16% 14% 10.6%
100% 100% 100% 100% 100% 100% 12.5%
Segment Sales Breakdown Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 5y CAGR
Off-Road Vehicles 67% 67% 65% 69% 69% 69% 13.3%
Snowmobiles 10% 11% 11% 9% 11% 9% 9.6%
On-Road Vehicles 6% 5% 3% 4% 6% 7% 16.3%
PG&A 16% 18% 20% 17% 15% 14% 9.5%
100% 100% 100% 100% 100% 100% 12.5%
0%
20%
40%
60%
80%
100%
D e c
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Off -Road Vehicles Par ts , Garments & Ac cess SnowmobilesOn- Ro ad V ehi cle s P ers ona l Wa te rc ra ftSales by Product Line
ATVs; 24%
Snowmobiles;
9%
On-Road
Vehicles; 8%
Parts Garments &
Accessor ise;
14%
Side by Sides;
45%
Side by Sides
ATVs
Snowmobiles
On-Road Vehicles
Parts Garments & Accessorise
Geographic Mix
United
States; 72%
Europe; 10%
Asia; 2%
LatAm; 1%
Canada; 14%
ME/Africa;
1%United States
Canada
Europe
Asia
LatAm
ME/Africa
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Research ReporAug 28th, 20
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Description Operates in the powersports industry (ATVs, Side by Sides, Snowmobiles & Motorcycles) Number #1 overall position in powersports in North America 1650 dealerships in NA, 1100 independent international dealers 4900 employees
Exhibit A: Powersports Market Share (ATVs, side by sides, Motorcycles, watercrafts, & snowmobile)
Reasons for Polaris gaining market shareo Unique patented design on recreational side by sideso Debt burdens of Japanese OEMs during the recessiono Polaris introduction of the maximum velocity program
Source: Company Presentation
Exhibit B: Polaris Powersports Snapshot
All-terrain vehicle Side-by-side vehicle Heavyweight Motorcycles Electric Vehicles Parts, Garments & AccesoriesSnowmobile ATV SSV 1400cc+9% of revenue 24% of revenue 45% of revenue 7% of revenue 1% of revenue 14% of revenue
Polaris Brand Indy, RMK, Assault, Switchback, Rush Scrambler Ranger, RZR Victory, Indian GEM, Goupil, AIXAM Teton Outfitters, KlimIndustry State Mature Mature Growth Mature High Growth GrowthGeography N.A. (2/3), Russia/Scandinavia (1/3) North American North American North American European GlobalDrivers (+) International Growth (+) Sensitive to economy (+) Replacing ATVs (+) Brand Awareness (+) Marketing (+) Disposable Income
(+) Fend off DOO/ACAT (+) International Growth (+) Gaining new customers (+) Taking share away from Harley (+) Entering NADemographics Male (75%), 41y, 95% repeat buyers Male (86%), early 40s Male, late 40s/early 50s Similar to Harley (old, male) Commercial clients Mix
$68 household income $53k average income $80-100k average income Some youthMarket Potential 175k Units/year 419k units/year 324k units/year 214k units/year NA NACurrent sales $283 million $2.2 billion (for all of ORV) $170 million $150 millionTotal Addresable Market 2012 $1 Billion worldwide $7-8 billion worlwide (for all of ORV) $4 billion North American $4 billionManagement 2018 market goal NA $3.0-$3.5 billion (for all of ORV) $500-800 million $1 billionGross margin profile Lowest Slightly above co. average Highest Average, high operating leverage Average 40%+Polaris Positioning Second in class Best in-class line up First in class Strong brand Early StageMarket Leaders 1. BRP (Sky-Doo/Lynx) (39%) 1. Polaris (~30%) 1. Polaris (40%+) 1. Harley Davidson (80%) Aftermarket players NA
2. Polaris (26%) 2. Honda (27%) 2. BRP (Can-Am) 2. Polaris (5%) Parts Unlimited3. Arctic Cat 3. Yamaha 3. Utility SSV Vendors 3. Yamaha, BMW, Honda Tucker Rocky4. Yamaha 4. BRP (Can-Am)
Growth Rates
Industry 2007-2012 CAGR -3.9% -15.5% 4.7% -9.1% NA NAIndustry 2013-2018 CAGR 2.0% 2.5% 7.0% 2.5% NA NAMSRP Range 7k-12.5k 6k-12k 10k-20k 26.5k-38k(indian) 7k-13k(GEM) Varies
12.5k-29k (victory) 25-35K(Goupil)Sales to Dealers September to January January - September January - September January - September NA Year Round
Powersports Industry SnapshotOff-road vehicles (ORV) On-road vehicles
Source: BMO Capital Markets, CIBC World Markets, Company Reports
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History
Part 1: Polaris starts off as a snowmobile manufacturer (1950s-1980s)
1950s: Polaris first started off as a rural farm equipment shop
1955: Built the first Polaris snowmobile designed to replace cross-country skies and snowshoes
1964: Released the first front-enginered Snowmobile that initially failed 1970s: Polaris sponsored snowmobiles dominate snowmobile races 1971: Global industry snowmobiles sales peaked at 495,000 units
Part 2: Push towards a global powersports leader (1985-Present)
1985: Started making ATVs (Honda created first one in 1971) 1992: Started making watercrafts (ceased production in 2004 due to distribution challenges and competitiv
pressures)
1997: Debuted first successful American motorcycle (Victory) in 60 years at Planet Hollywood at the Mall of America 1998: Crossed $1B sales mark
2004: Started military ATVs 2005: Global industry ATV sales peaked at 1,138,000 units because of the switch to side by sides
2006: Sold retail financing division 2007: Introduced first Recreational Side by Side Vehicle (RZR XP) 2011: Entered small electric vehicle market through acquisitions
2011: Purchased the Indian Motorcycle 2013: Purchased European quadricycle manufacturer AIXAM
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Side by Sides (SxS/SSV)45% of revenue
History:o 1980s-1990s: Deere & Kawasaki created the utility side by side segment (inspired by golf carts).o 1998: Polaris saw opportunity to introduce an utility side by side that was high performance as the indus
players were not producing one (i.e. one that would do well in any landscape). Polaris introduced its RangUtility side by side
o Mid 2000s: A new category “Recreation Side by Sides” was introduced by Yamaha Rhino. This type of sidby side was used first as a toy than as an utility vehicle. The Rhino was a low performance rec side by side
o 2008-2011: From 2008-2011 there was no competitor in the recreational/high performance side by sidmarket allowing Polaris to create a new segment in the industry and is now ~60% market share within thspecific segment, with Polaris` RZR side by side
o Japanese OEMs were going through the recession and creating a new side by side to compete with Polawas not at the top of their priorities
o 2012-2013: These years are characterized by an influx of new competitors in the side by side space. ArctCat, BRP, Honda, and Yamaha have all released new side by sides to compete against Polaris
User Base:o Recreational (59%)
Hunting/Fishing (25%), Trailing/Recreational (18%), Private Property (11%), Dunes/Comping (1%)o Utility vehicle (41%)
Farm Ranch (29%), Property management (13%) and other (2%)
Demographics:o Much higher income than a typical ATV user
Ex: Polaris RZR XP 900 avg. income is 140k Replacement cycle is also higher for side by sides (avg. life cycle is 2.5 years vs. 5 for ATVs)
Strategy:o Make the most innovative products as judged by quality/performance
Ex: Ranger (Utility, Trail), RZR (Performance)o Grow number of Polaris side by side riders
Risks:
o Peak market share? Snowmobiles 43% market share by BRP Personal water craft vehicle 46% market share by BRP US heavyweight motorcycles 57% market share by Harley Davidson
ATV ~30% market share by Polaris Side by sides 40%+ market share by Polaris High-performance side by side market (recreation) 60% market share by Polaris
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Snowmobiles9% of revenue
User Base:o Recreational users, law enforcement units, surveyors, ranchers, public utility employees, environmen
scientists, ski-touring centers, cross-country ski race officials, dog sled races & ski patrolso Over 4 million snowmobilers in NAo Very loyal buyers (95% of snowmobile customers are repeat buyers)
Strategy:o Legacy business, goal is to maintain market share
Snowmobiles will decline as a % of revenue(50% of revenue in 1993, 26% of revenue in 2000, now less than 10%)
Types of snowmobile categorieso Mountain (29% of revenue): Horsepower and climbing ability used for steep hillso Performance (26% of revenue): Designed to go fast and take a beating Source: CIBC WM o Touring (9% of revenue)/Cross-over (22% of revenue): SUV of the snowmobile world. Ideal for loggi
hundreds of miles on groomed trails.o Utility (14% of revenue): Featues extra wide tracks to support added weight the sleds have to carry
Motorcycles 1400cc+ (Heavyweight)7% of revenue
Two brands under the Polaris Portfolio
Victory: Performance/distance oriented bikes – but no lifestyle/history factor like Harley. Competes against Euros and Japanese OEMs
o Introduced in 1998 (Initial plan was in 1993, hired McKinsey and took them 5 years to perfect manufacturindistribution & marketing to market)
o Entered cruiser market (leisurely travel) as they felt this market was underservedo Target was hard-core Polaris enthusiasto Took 8 years to profitability (2006) – succeded because consumer wanted US bike, which the Japane
alternatives just didn`t cut it
o Leveraged existing Polaris dealer base, and engineering & manufacturing expertise Took 5% of market share of heavyweight motorcycle market
Indian: Very historical motorcycle bike – direct competitor to Harley – targeting baby boomers Classic rider, more image conscious
o Very historical brando HD & Indian were the only 2 American manufacturers post the great depression and they controlled half of
the motorcycle market. However, Indian went bankrupt in 1953.o Polaris acquired the brand in 2011, set to launch in 2014
Give consumers another choice to Harley Davidson`s bikeo Starting out with 125 US dealers with 25-30 motorcycles each (Harley has 800 dealers). Scott Wine feels P
can go up to 400 US dealerso Target is 10-20% of the heavyweight cruiser/touring market ($500M revenue opportunity)
Why is this time different?o Polaris feels that the Harley Davidson (57% mkt. share) customer hasn`t considered other brands o Polaris was able to become the #2 brand in North America with Victory Motorcycles, and they feel by puttin
a large brand behind them, they will better their previous success of stealing 5% of the heavyweigmotorcycle market
o However; Indian Motorcycles is most likely a niche product and unless the story picks up significantly will nadd much to Polaris already $4.0B revenue (2014E)
North American Snowmobile MarketShare (2013)
43%
28%
20%
9%
BRP Polaris
Arctic Cat Yamaha
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Parts, Garments & Accessories14% of revenue
Parts (6.6% of revenue) – Consists of replacement parts & oil (highest margin of entire PG&A) Garments (0.6% of revenue) – Consists of jackets & apparel Accessories (7.8% of revenue) – Consists of cabs, cab components
SMALL VEHICLE SEGMENTS1% of revenue
Grow and become a global leader in small electric/hybrid vehicle industryo Focus on global light duty haulers and people mover segments o Large business opportunity ($4B fragmented market) o Grow through strategic M&A (spend $150M of cash since 2011)o Little innovation within the space provides opportunity ``golf cart derivative analogy`` o Diversify Polaris revenue line
1. GEM ($30M of revenue)o GEM vehicles are multipurpose, low-speed neighborhood electric vehicles produced in Iowao They are 100% electric, battery powered (30 miles on a charge, takes 6-8 hours to charge), with spee
topping out at 25mpho High utility uses: People mover, light duty hauler, hospitality, parking enforcement, public safety patrol, m
delivery, police patrol, security patrol, neighborhood commuting, university student tours 2. Goupil ($30M of revenue)
o Leader in ultra-light commercial electric & hybrid utility vehicles, primarily in France o Use existing Polaris manufacturing, design experience to leverage brand o Manufacturing in France o 40 dealers, 90 employeeso Global market opportunity of $900M, Europe $70Mo High utility uses: for municipal, industrial, delivery, service providers and other commercial customers
3. AIXAM (acquired in 2013) ($90M est. of revenue): European enclosed Quadricycles manufacturer (no driver`s license required) Niche market: France, Spain, Italy Target market: Rural folks who do not have a license Aixam (90% of salse): Six product lines (diesel, EV vehicles ranging from 8k-20k Euros) Mega (10% of sales): Subsidiary of AIXAM, does same thing as Goupil 400 dealers: Potential to cross sell off road vehicles
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FINANCING DIVISION10.9% of net income
Wholesale Credit:Products that are sold to dealers are financed through floor plan financing offered by Polaris Acceptance (JV).Floor plan financing allows a dealer to carry a large amout of product without having the initial cash.Polaris Acceptance is a JV (Polaris owns 50%, GE owns 50% of Polaris Acceptance) – expires in 2017
Net amount financed by Polaris Acceptance was $767.2M as of Dec 31, 2012o No credit risk for Polaris o Return risk: Polaris has agreed to repurchase a maximum of 15% of average month-end balanc
outstanding for returns. Risk was $79M in 2012.o Securitization: Polaris Acceptance sells a portion of its receivables to a securitization facility, which Pola
is not liable for any other servicing costs or obligations Polaris Acceptance securitized an outstanding balance of $601M of receivables for FY 2012
Retail Financing:This relates to consumer and commercial credit to customers of Polaris dealers for Polaris products
GE, HSBC & Sheffield partnershipo Approval rates are at 60% o Polaris earns a referral fee o Polaris used to in-house this, but they stopped in 2006 o No risk to Polaris
Exhibit D: Polaris 2012 10K, Note 8, Financial Services Arrangemetns
Income in $000s As a % of EBT
Equity in earnings of Polaris Acceptance 3,899 0.9%Income from Securitization Facility 11,862 2.7%Income from retail credit agreements (HSBC, GE, Sheffield) 15,296 3.4%Income from other financial services activities 2,863 0.6%Total income from financial services 33,920 7.6%EBT 2012 445,923
DEALER STRATEGY Maximum velocity program (MVP) program: (introduced in 2006)
o Prior to the MVP program, orders were taken from dealers only two times per year They were long order periods with forecast inaccuracies for both Polaris and the dealer There was dealer inventory build
o The MVP program allows dealers to make smaller orders more frequently (every 2 weeks), which is uniquethe industry
o The MVP program leads to fewer stock outs and fewer overstocks for the dealer The program led to higher profit margins for dealers, more inventory space, and more floor space
Polaris Polaris currently has 1650 dealers in North America, and does not plan to grow this base substantially
o Key is growing rev/dealer by growing market share (measures brand value) Polaris: $2M revenue / dealer for Polaris Harley: $2.3M revenue / dealer (#1 in Industry).
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Military:
Polaris wants to be the leader in ultra-light military vehicle market Customers: Special operations, U.S. army, International governments
Sportsman MV 850 Ranger XP 900 MRZR 2
Bobcat: Bobcat partnership with Polaris:
Number #1 compact construction equipment manufacturer teams up with #1 ORV manufacturer Partnership to penetrate work-related market segments globally
Bobcat provides a product to Polaris
Growing International markets Goal: Grow % of sales outside of North America from 15% to 30% by 2018 Strategy: They currently offer a fraction of Polaris full portfolio. Leverage existing product line internationally.
Current international revenue mix: 67% Europe, 15% Australia/NZ, LatAm 7%, ME/Africa 7% and Asia 4%
Less confidence in the success of the international growth story as powersports is more a North American product
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Cost Structure
Margin Analysis Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12
Revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold 74.4% 73.7% 70.8% 70.0% 69.6% 69.0%
Gross margin 25.6% 26.3% 29.2% 30.0% 30.4% 31.0%
Selling & Marketing 7.0% 7.0% 7.1% 7.1% 6.7% 6.6% Research & Development 4.1% 4.0% 4.0% 4.3% 4.0% 4.0%
General & Administration 3.6% 3.6% 4.5% 5.0% 4.9% 4.5%
Depreciation 3.5% 3.4% 4.1% 3.3% 2.5% 2.1%
Amortization of intangibles 0.0% 0.0% 0.0% 0.0% 0.0% 0.1%
Stock based compensation 0.9% 0.5% 1.1% 3.0% 2.8% 2.3%
EBIT margin 7.3% 8.3% 9.4% 10.2% 12.3% 13.8%
EBIT margin (Adj.) 8.2% 8.8% 10.5% 13.2% 15.1% 16.2%
EBITDA margin 10.8% 11.7% 13.6% 13.6% 14.8% 16.0%
NOPAT margin 5.4% 5.8% 7.0% 8.9% 9.9% 11.3%
Interest Income 5.0% 14.3% 3.0% 3.0% 0.2% 1.8%
Interest Expense (7.6%) (4.8%) (2.1%) (1.3%) (3.7%) (5.5%)
EBT 9.6% 9.1% 9.7% 11.0% 13.0% 14.9%
Tax Rate 33.9% 33.7% 33.2% 32.7% 34.3% 34.9%
Net Income After Taxes 6.27% 6.03% 6.45% 7.39% 8.57% 9.73%
Non Recurring Items 0.40% 0.00% (0.57%) 0.04% 0.00% (0.01%)
Adj. net profit margins 6.68% 6.03% 5.88% 7.43% 8.57% 9.72%
Exhibit E: Cost Breakdown (% of revenue)
Research & Development
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
déc-
98
déc-
00
déc-
02
déc-
04
déc-
06
déc-
08
déc-
10
déc-
12
$ U S ( 0 0 0 s )
Research & Development
Capex
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
déc-
98
déc-
00
déc-
02
déc-
04
déc-
06
déc-
08
déc-
10
déc-
12
$ U S (
0 0 0 s )
Capex
Sales & Marketing
8.0%
9.0%
10.0%
11.0%
12.0%
13.0%
14.0%
15.0%
déc-
98
déc-
00
déc-
02
déc-
04
déc-
06
déc-
08
déc-
10
déc-
12
$ U S ( 0 0 0 s )
Sales & Marketing
Cost of Goods Sold
65.0%
67.0%
69.0%
71.0%
73.0%
75.0%
77.0%
79.0%
déc-
98
déc-
00
déc-
02
déc-
04
déc-
06
déc-
08
déc-
10
déc-
12
$
U S ( 0
0 0 s )
Cost of Goods Sold
Source: FactSet
1) Gross margin has increased from 21.8% in 2002 to 31% in 2012 GM% improvement related to engineering cost savings, shifting a plant outside of the U.S., and the maximu
velocity program 2) G&A% steadily increasing over time as is SBC% negating some of the improvement in GM
Manufacturing Polaris mostly assembles, paints and welds
Much lower capital base than auto OEMs leads to a much more higher ROIC
Mostly engines are sourced along with fuel tanks, tracks, tires and other instruments
Order/manufacturing process: Off-road vehicles
o ORVs are manufactured in response to orders under two-week intervals process under the MaximuVelocity Program (MVP) introduced in 2008
Motorcycleso New program introduced in 2H13 where orders are placed continuously on what the dealer is selling, with t
product arriving within 10 days of the order being placed
COGS Breakdown:o Raw Materials = 88%o Labor = 8%o Depreciation = 2%o Warranty Costs = 2%
Raw Materials Breakdowno Aluminium, steel & plastic resins
comprise 20-25% of total COGSo Components purchased from
suppliers, rubber, shipping, fluid75-80% of total COGS
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Exhibit H: SxS industry Market Share by Manufacturer
Source: BMO Capital Markets
MOTORCYCLE LANDSCAPE Polaris competes in the North American heavyweight 1,400cc+ motorcycle market , which sells 214,0
units/year globally.
The motorcycle market competes on the following categories:o U.S: Touring & Cruiser is 85% of heavyweight market, and is used for recreation purposes
Touring motorcycles are equipped for longer distance riding and designed for comfort Consumers care about style and image
Cruiser motorcycles are big, noisy, macho motorcycles, created by Harleyo Europe: Much different landscape than the U.S
Sports bikes are preferred, as they make up 36% of heavyweight market. Bikes are used for transportation instead of recreation Dominated by Yamaha, BMW, Honda, Kawasaki & Suzuki
N.A. Hea vyweight Motorcycles Units Sold (000s)
-
100
200
300
400
500
600
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: Wells Fargo Securities
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Competitive Landscape:o Harley Davidson dominates the 1400+cc motorcycle segment (80% market share)o Harley-Davidson, Triumph, BMW and Polaris compete in the high-end heavyweight class
North American 1400+cc Competitive Summary
CONCLUSIONS
Polaris is the current market leader in powersports and is a very well run companyo Very nice track record from 2008-2012 with near-perfect execution
However we expect competition to ramp up significantly in the SxS segmento Polaris competes in a space where the threat of new entrants is higho Ultimately, increased competition will lead to margin pressure and potential market share erosions
A lot more downside than upside and a lot of uncertainty in the storyo First mover advantage quickly goes away on an unsuccessful product launcho Success of Indian motorcycles story and other growth avenues is unknown
Lots of leaps of faith to be taken with management executing in new growth avenues and fending off competitiwithin the side by side space
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INVESTMENT THESISPositives
Polaris is more profitable than the Auto OEMso No safety requirementso EPA Regulationso No heavy manufacturing
Source: Factset
Long term track recordo Polaris has been a leader in powersports since it started in the 70s making snowmobileso The past 5 years under Scott Wine has been excellent
Strong board & corporate governance structureo Compensation tied to profitable growth and high ROICso Strong management team and board with operations experience
Risks/Negatives
Industry is mature for most powersports except for SxSo We have not seen a strong recovery in unit sales in any of the powersports segments except SxS
Low bargaining power of customers and little switching costs in-between brandso If Polaris fails to constantly innovate, than consumers will switch brands
Potential for large value destructive acquisitiono Management highlights they will do total acquisitions to boost their revenue by 1-2B in the next 5 years
Polaris is not planning to grow its dealerbaseo Future growth based on market share shifts, which we believe Polaris is near its peako A lot of uncertainty in Polaris maintaining marketshare as competition increaseso SxS are getting more competitive as the Japanese ramp R&D in SxS
Lots of downside, little upside in powersports story for Polariso The scenario that management is aiming for is Polaris to maintain market share as said by the CFOo The downside scenario is Polaris can lose substantial market share in off-road-vehicles and fail to execute w
Indian Motorcycleso Translates to an U/D ratio of 0.33x
Valuationo Polaris is trading at 17.3x NTM EV/NOPAT (incl. income from financing JV), which is above my fair value of 14xo Above historical trading range (14x EV/NOPAT)o Market is giving Polaris the benefit of the doubt that they will remain as the number 1 powersports company
the next 3-5 yearso If the multiple comes down to 14x, it is likely because the story has deteriorated (i.e. new entrants stealing mark
share), and I would not conclude at that time that the stock has gotten `cheaper`o Given the potential for 3-5% long run organic growth, the long term expected return converges to 8-10%
Days Inventory on
Hand
Days of Sales
Outstanding
Asset
Turnover ROIC
BRP 72 29 1.3x 14.8%
F 21 242 0.7x 5.7%
GM 39 29 1.0x 12.8%
HOG 43 129 0.6x 9.4%
PII 51 16 2.2x 44.6%
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INVESTMENT CRITERIA (5/7)1. Sustainable Competitive Advantages and Barriers to Entry. (0.5/2)
Competitive advantage is not wide as scale and brand equity already exist for Japanese / European OEMso R&D Budgets for larger players are up to 70x that of Polaris
2. Industry Attractiveness. (0.5/2)
Snowmobiles, Motorcycles, ATVs are all far off their peak
Powersports is more of a US centric product (RZR avg. income is 140k) and could be a fad3. Quality of Management (1/1)
The management team has significant experience with Polaris Board and compensation structure is well aligned to create value
4. Proven Track Record. (1/1)
Since the 1970s the track record for Polaris has been very strong5. Solid Balance Sheet. (1/1)
Debt profile & invested capital is very low, large cash balance No credit risk related to consumer / wholesale loans
VALUATION
Key Assumptions
Revenue growth assumptions (2013-2018)o Bull Case (25% probability): Assume Polaris increases market share in ORVs by 500 bps to 41% of t
market, and gains success in Indian vehicles (10% of market) and small vehicles ORVs 6.9% (5yr. CAGR revenue) Snowmobiles 2% (5yr. CAGR revenue) On-Road Vehicles 11.1% (5yr. CAGR revenue) PG&A 8% (5yr. CAGR revenue) 7.2% organic growth (total expected return 13-14%)
o Base Case (60% probability): Assume constant market share in all segments, and moderate success Indian (4% mkt share by 2018)/Small vehicles
ORVs 5.1% (5yr. CAGR) Snowmobiles 2% (5yr. CAGR) On-Road Vehicles 8.9% (5yr. CAGR) PG&A 6.2% (5yr. CAGR) 5.4% organic growth (total expected return 11-12%)
o Bear Case (15% probability): Assume 500bps of market share losses in all segments, and lackluster succewith Indian/Small vehicles --
ORVs 2.7% (5yr. CAGR) Snowmobiles -2.3% (5yr. CAGR) On-Road Vehicles 4.2% (5yr. CAGR) PG&A 3.1% (5yr. CAGR) 2.6% organic growth (40% downside)
Assumptions summaryo Topline CC = 4.7% (base case)o NOPAT = 8.3%o Valuation = 17. 6x EV/NOPATo 5yr expected return = 5% (probability weighted average)
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RED FLAGS
Corporate Governance Checklist
Type Yes No
1 Chairman / CEO is the same person X
2 Majority non-independent directors X
3 Inexperienced board (lack diversification, sufficient exp. + attendance) X
4 Excessive deal making X
5 Nepotism X
6 Complicated corporate structure (revenue / business model) X
7 Excessive tax avoidance X
8 Excessive management compensation X
9 Multiple voting rights / different share structures X
10 Creative accounting (revenue rec., inventory calc, restatements etc.) X
11 Lousy investor relations X
12 Serious stock issuer X
CONCLUSION
Fantastic execution & track record, but there are some significant downside scenarioso High threat of new entrants within side by side businesso Potential for failed launch of Indian motorcycleso Currently undiversified revenue base (~25-30% of OP from high performance side by sides)
Recommendationo HOLD
Porter 5 Forces Analysis
Weak Business Strong Business
Score 0 1 2 3 4
Bargaining power of suppliers X
Bargaining power of customers X
Threat of substitutes X
Threat of new entrants X
Competitive rivalry X
Total 50%
Porter Five Forces Analysis
Average Business Bargaining Power of Customers
o Powersports OEMs cannot increase prices YoY
Bargaining Power of Supplierso Very low as raw materials used are readily available (Fuel tanks, tracks, tires, seats, & instruments)o Proprietary technology is key for establishing brand equity (developed internally however)
Threat of New Entrantso There are a lot of established players with large R&D budgets who can decide to enter the powersports market
Threat of Substitute Productso Snowmobiles was a popular toy in the 80s but was quickly replaced, as was the ATVs.
Competitive Rivalry within an Industryo 5-6 manufacturers account for 80-90% of sales
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APPENDIX:
Exhibit I: Board of Directors – Independent 6/7
1: Scott W. Wine (CEO & Chairman) – Director since 2008o CEO of Polaris since 2008o President of Fire Safety Americas, the Fire & Security Division of UTX from 2007-2008o Senior leading positions at Danaher Corp from 2003-2007o Supply officer in Navy for 7 years
2: Bernd F. Kessler (CEO & Chairman) – Director since 2010o CEO of SRTechnics AG (2008-2010), privately held aircraft, component and engine service providero CEO MTU Aero Engines AG, aero engine design, development, manufacturing & service companyo Executive positions at Honeywell International for 20 years
3: Gary E. Hendrickson (CEO & Chairman) – Director since 2011o CEO of The Valspar Corporation, a global paints and coatings manufacturer
4: R.M. (Mark) Schreck – Director since 2000o VP, Technology, General Electric (GE) – Retired
5: William Grant Van Dyke – Director since 2006o Chairman of the BOD for Donaldson Company, Inc.
6: Annette K. Clayton – Director since 2003o EVP, Global Supply Chain, Schneider Electric (2011- Present)o VP, Global Operations, Dell (2006-2011)o President of Saturn Corp & VP Quality at General Motors (1983-2006)
7: John P. Wiehoff – Director since 2007o CEO/Chairman C.H. Robinson Worldwide (CEO since 2002)
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Exhibit J: Polaris Motorcycle Market Opportunity / Positioning
Exhibit K: Victory 2014 Product Line
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Exhibit L: Indian 2014 Product Line
SNOWMOBILES LANDSCAPE
Geographic Sales:o NA 70% of saleso Scandinavia/Russia most of the remaining % of sales
Structural Declineo Reason for the structural decline in snowmobiles sold relates to increased reliability, strong second ha
market, high prices (relative to other powersports), high transportation costs and low marketing to a sport thhas very little incremental new users every year (95% purchases by previous snowmobile owners)
Exhibit M: Snowmobile Historical Sales Chart
Source: CIBC World Markets
GLOBAL SMALL VEHICLE MARKETS LANDSCAPE
Market Size: Mostly in NA (80%), Europe & China growing fast, and Brazil/India is emergingo $4B global industry, no key player in it
Drivers: Demand for clean low cost vehicles Key success factors: Distribution network, high quality, innovative, low cost products, Long term goal: $1B Sales by 2018, #1 Market Share in Industrial, People Movers and Light Duty Haulers Key to success: Application engineering, price/value, technology, flexibile manufacturing, leverage distribution
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Source: Company Presentation Golf:
o Yamaha, ClubCar and EZGO own 90% of fleet golf marketo Market Size ~$1B
o Limited product innovation
Light Duty Haulero Limited global distribution, as Mega, Renault, and Piaggio (largest 3 players) are European focusedo Competitors leverage their automotive brand & distributiono Solid products, limited innovation
Electric vehicleso Leading niche players (Taylor-Dunn, STAREv, Columbia ParCar Corp, Cushman, and Tomberlin)o Highly fragmented distribution network presenceo Nominal product innovation historically
Exhibit N: GEM Product Line
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Exhibit Q: SxS Pricing by OEM
Source: Stephens Inc.
Exhibit R: Dealer Satisfaction SxS
Source: Desjardins Securities
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Exhibit T: Polaris Manufacturing Facilities
Source: Stephens Inc.
Source: Stephens Inc., Initiating Coverage. Sept 21 2012
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Exhibit U: Polaris ATVs
Exhibit V: Polaris Side by Sides
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Exhibit W: Dealer Landscape
Source: BMO Capital Markets
Exhibit X: M&ADate Target Sales (M) Region Category
Acquisitions
11 Apr '13 AIXAM-MEGA SA 90.00$ EMEA Quadricycles
06 Dec '12 Teton Outfitters LLC 30.00$ Parts, garments & accessories
16 Nov '11 Goupil Industrie SA 25.00$ Mostly Europe Commercial electric vehicles
25 Apr '11 Global Electric Motorcars LLC from Chrysler Group LLC 30.00$ U SA Com mercial electric vehicles
19 Apr '11 Indian Motorcycle Ltd. from Stellican Ltd. NA USA Motorcycles
03 Feb '10 Swissauto Powersports AG NA Engines
20 Jul '05 Minority stake in KTM-Sportmotorcycle AG from KTM Power Sports AG 80.00$ Austrian motorcycles Source: Company Press Releases, Factset