Off-road is this company’s business
Polaris Industries Inc. (NYSE:PII) manufactures side-by-side vehicles, ATVs, motorcycles, electric vehicles and defense-utility vehicles. Polaris Industries Inc. (NYSE:PII) also manufactures parts and accessories to go with its products as well as apparel for the outdoor rider. Its products are manufactured and distributed under the names Polaris Industries Inc. (NYSE:PII), Ranger, Victory, Indian and Cross Country.
In July, Polaris Industries Inc. (NYSE:PII) reported record second-quarter earnings. Sales rose 12% to $844.8 million while net income rose 15% to $80 million, or $1.13 per share. For the 16th consecutive quarter, Polaris Industries Inc. (NYSE:PII) gained market share in ATVs and side-by-side vehicles. The gross margin increased 120 basis points to 29.9%. This was due to higher selling prices for its products and lower input costs. The company expects full-year earnings to rise 18% to 20% compared to last year. Full-year sales are forecast to rise 13% to 15% over last year.
Going forward, Polaris Industries Inc. (NYSE:PII) expects significant demand for its new lineup of vehicles. The company is also relaunching the Indian motorcycle brand in August. Polaris acquired the Indian brand 27 months ago and has retooled the company to compete head-to-head with market leader Harley-Davidson, Inc. (NYSE:HOG). Polaris has been able to use its knowledge from building the Victory brand from scratch into the number-two player in heavyweight motorcycles. Indian will also be part of a History channel special highlighting the Sturgis Bike Week.
In terms of selling channels, Polaris already has 125 to 140 dealers in North American and 70 internationally to sell Indian products. On the company’s earnings call, CEO Scott Wine said:
Indian is ready to launch and we’re excited to bring choice back to the American motorcycle market. America’s oldest motorcycle brand has a story and an occasionally troubled history, but we are confident that this year and this century, we will restore Indian to its prominence.
Best-known for its snowmobiles
When one thinks of Arctic Cat Inc (NASDAQ:ACAT), the first thing that comes to mind is snowmobiles. The company also makes ATVs and side-by-sides under the Arctic Cat Inc (NASDAQ:ACAT) name. The company also markets outerwear for snowmobile and ATV riders.
Last fiscal year was a banner year for Arctic Cat Inc (NASDAQ:ACAT). Total sales increased 15% to $671.6 million. Sales were driven by strong demand for the company’s ATVs and Wildcat side-by-side products. Earnings per share rose 68% compared to the prior year. Arctic Cat Inc (NASDAQ:ACAT) expects this fiscal year’s earnings per share to rise 10% to 13%.
There is plenty of room for Arctic Cat Inc (NASDAQ:ACAT) to grow, especially considering that it is smaller than Polaris and Honda Motor Co Ltd (ADR) (NYSE:HMC) with a market cap of only $655 million. Because it’s smaller than Polaris and Honda Motor Co Ltd (ADR) (NYSE:HMC), Arctic Cat Inc (NASDAQ:ACAT) doesn’t get as much attention as the others do. However, that is changing as Arctic Cat gains market share in ATVs and side-by-sides and expands outside of its core snowmobile business.
Last year, ATV and side-by-side sales rose 32% to $299.8 million, accounting for almost half of all sales at Arctic Cat. The company has plenty of room for growth as it expands its dealer network and expands into international markets.
This year, Arctic Cat is introducing several new models to capture growth. Arctic Cat is introducing a new side-by-side product called the Wildcat Four, which will have four seats instead of the usual two. The company is also introducing 10 new snowmobile models to boost sales.
The motorcycle of choice in emerging markets
Honda Motor Co Ltd (ADR) (NYSE:HMC) also makes a full line of off-road vehicles besides its Honda Motor Co Ltd (ADR) (NYSE:HMC) and Acura automobiles. Honda Motor Co Ltd (ADR) (NYSE:HMC) makes off-road motorcycles, street motorcycles, scooters, ATVs, and side-by-side vehicles. Honda Motor Co Ltd (ADR) (NYSE:HMC)’s principal business is automobiles where it gets 80% of its revenue. Motorcycles and ATVs account for 13.5% of revenue.
Last year, sales of motorcycles and ATV’s totaled 9.5 million on a global basis, an increase of 9.9% from the previous year. Sales in the U.S. rose 2% last year to 678,000 units. The strongest demand for this segment is in emerging markets such as Thailand, China and India, where motorcycles and scooters are the preferred choice of transportation.
Going forward, Honda’s auto business is its primary business and will have the most impact on the top and bottom lines. Among the big Japanese automakers, Honda has the most exposure to the North American market and will benefit from the economic recovery in the U.S. market.
In terms of motorcycles and ATVs, motorcycle growth is driven by demand in Asia. Honda has a wide selection of models that appeal to different markets. Honda has the size and scope in Asia that is unparalleled in the industry.
For a company of Honda’s size, it is quick to make changes. At its South Carolina plant, the company shuttered its watercraft division and transitioned to making the Pioneer side-by-side. Honda is investing $27 million over the next four years in the South Carolina plant to improve efficiencies. Since 1998, Honda has invested over $308 million in the plant and produced over 2 million ATVs.
Foolish assessment
Overall, I like the off-road segment as the industry is benefiting from strong tailwinds due to strong demand from its riders. My favorite would be Polaris because it’s the market leader and because of the potential with its Indian brand to mount a challenge to industry leader Harley-Davidson, Inc. (NYSE:HOG). My second favorite is Arctic Cat because of its small size and growth potential. Lastly, I like Honda motorcycles and its off-road vehicles, but it’s an auto company, which is a more competitive market.
Polaris and Arctic Cat are focused on their core markets and are looking to increase their respective market shares. For these reasons, Polaris and Arctic Cat are the companies to own.
The article Head Off-Road for a Good Buy originally appeared on Fool.com and is written by Mark Yagalla.
Mark Yagalla has no position in any stocks mentioned. The Motley Fool recommends Polaris Industries. The Motley Fool owns shares of Arctic Cat. Mark is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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