What to Look For in Polaris Industries Inc's Earnings Report

By Earnings Fool.com

There isn't a bat icon on the hood of the three-wheeled Slingshot, but Polaris Industries is still hoping for it to power sales higher. Image source: George Shahdavia Flickr.

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Polaris Industries (NYSE: PII) might be riding a little bit higher after analysts said rival Harley-Davidson (NYSE: HOG) was losing market share and was likely to post a big drop in motorcycle sales this quarter, presumably with Polaris' Indian Motorcycle nameplate picking up the lion's share of those lost sales.

But with motorcycles still only accounting for less than 15% of total revenues, there may be a few other things investors ought to keep their eye on when the powersports vehicle maker posts its first-quarter earnings on Thursday, April 21.

Metric Q1 2015 Q1 2016 est. % Change
Revenue $1.03 billion $968.6 million (6.3%)
EPS $1.30 $0.71 (45.4%)

The off-road vehicle market has suffered broad weakness as macroeconomic headwinds, currency fluctuations, and competitive pressures take a toll. Last time out it specifically pointed to the collapse in oil prices hitting oil-rich states like Texas, Oklahoma, and Louisiana as the reason sales of ORVs dropped 20% in North America. Moreover, OPEC nations also just recently failed to reach an agreement on limiting production, and oil's price tumbled again. With high inventories and storage at full capacity, we may be in a period of persistently low prices for oil.

That's good for consumers, but not necessarily good for off-road vehicle manufacturers selling into markets depressed by the situation. Polaris noted in its fourth-quarter conference call that ORV retail sales in oil-producing states were down about 10% for the full year while the rest of the North American market was up mid-single digits. Considering the sales hit it took last quarter, that means the vehicle maker's business is highly skewed toward those few states, so not even oil's 50% rebound since its February lows is likely to change that situation much.

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That suggests Polaris may have to take inventory reductions at dealers as it did last quarter. It has a mid-single-digit inventory target for them, and the weak market caused it to withhold a large amount of its otherwise highly profitable RZRs and Rangers from dealerships, the first time in six years it had to do so. Consumers may have been out buying cars in record quantities, but that hasn't translated into big-ticket purchases in the ORV market, and Polaris said there was no indication the situation was going to improve in the power-sports industry throughout 2016.

That means the vehicle maker will have to maintain its cost discipline policies for the foreseeable future. It has said that although the amount it actually spends this year is probably going to be higher than last year (mostly due to compensation expenses), as a percentage of sales, Polaris' operating expenses are expected to improve.

Still, the ORV/snowmobile market is going to remain under pressure, even if the rough winter weather we had helps spur some extra sales of the latter. Rather, it will be left to the motorcycle division to pick up the slack.

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Sales of Indian motorcycles and the Batmobile-like three-wheeled Slingshot are expected to continue making gains. Across all of 2016, Polaris is expecting high-teen percentage sales gains, and since Harley-Davidson has yet to figure out a way to arrest the slide in sales it's been experiencing, Polaris Industries willprobablykeep taking share.

Offsetting those gains, though, will be the currency headwinds that have been buffeting its results for the past two years. Like the weakness in ORV sales, foreign exchange rates will put a damper on its growth. Parts, clothing, and accessories sales, however, may help blunt that edge a bit, as Polaris expects growth to exceed the growth rate of the whole company.

There are many more moving parts here than what investors might find at Harley-Davidson, which is mostly about selling motorcycles, or at Arctic Cat, which generates 85% of its revenues from snowmobiles and ORVs. As Polaris is to Harley in motorcycles, seeing outsize gains because it is starting from a smaller base, so is Arctic Cat to Polaris. It generates sales all year long that are just half of what its rival sells in a quarter.

The market hasn't materially improved for Polaris Industries since it reported its year-end results in January, and that may lead it to report underwhelming results later this week.

The article What to Look For in Polaris Industries Inc's Earnings Report originally appeared on Fool.com.

Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Polaris Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.