Better Buy: Polaris Industries Inc. vs. Textron

By Rich Duprey Markets Fool.com

One is the leading powersports vehicle manufacturer, the other a major aerospace and defense contractor. While Polaris Industries (NYSE: PII) and Textron (NYSE: TXT) would seemingly not have a lot in common, the latter does compete in the utility vehicle market, and its recent acquisition of Arctic Cat puts it in direct competition with the former's snowmobiles and off-road vehicles.

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Yet while Textron has twice the market cap of Polaris, that doesn't automatically make it the better stock to buy. So read on as we break down the bull case for each company to determine which is the better investment.

Image source: Polaris Industries.

Why Polaris Industries is better

Off-road vehicles are, of course, where Polaris makes most of its money, accounting for two-thirds of its sales. Its ATVs, UTVs, and line of snowmobiles combined to generate $724 million of Polaris' $1.15 billion total revenue in the first quarter of 2017 and almost $3.4 billion of the total $4.5 billion in sales for all of 2016.

While the company has been beset by persistent recalls due to fire hazards in its vehicles, it is working through the repair process. And while the costs for repairs are climbing, at $125 million they haven't debilitated its financial operations. It is taking a hit to its reputation for quality, but even the slippage seen in market share hasn't been all that much. Once this sorry episode is behind it -- and there's good reason to think it soon will be -- Polaris can focus on growing its market share once more.

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Motorcycles are Polaris' other notable accomplishment. The purchase and resurrection of the Indian Motorcycle brand has paid off handsomely for it, and though the division remains just a small component of the overall business at the moment, it has gained a lot of market share in a short time, leapfrogging bigger manufacturers to take second place behind industry leader Harley-Davidson, which owns half the market. Even in an industry slowdown, Indian retail demand has remained strong, and contributed to the decision to wind down the less successful Victory brand.

Image source: Indian Motorcycle.

The third component that shows a lot of promise now is the aftermarket parts market. Injecting itself into the industry with its purchase of leading Jeep and truck parts retailer Transamerican Auto Parts, Polaris is adding a high-margin business to its lineup, a nice trade-off from the lower-margin Victory business it's letting go. It will also be a bit of a salve for profits, which have been hurt by the recalls that have forced the powersports vehicle maker to become aggressively promotional to bring in customers and retain share.

Polaris Industries has wobbled from the twin headwinds of recalls and overall industry weakness, but it has not broken. Its stock has lost almost half its value from the peak it reached in 2014, but with a proven ability to produce strong free cash flow, coupled with a dividend that yields 2.7% and which it has consistently paid for more than two decades, the powersports vehicle maker is a good bet for a comeback.

Why Textron is better

An industrial conglomerate, Textron operates a global network of aircraft, defense, industrial, and finance businesses that generated more than $13.8 billion in revenue last year. Aviation, at almost $5 billion, is the largest segment, but including its Bell division, which is primarily involved in the military's V-22 Osprey tiltrotor aircraft and H-1 helicopter program, it's another $3.2 billion in revenue, or almost 60% of the total.

Image source: Boeing.

Textron says a quarter of its revenue comes from military spending, and it got a bit of a boost in April when President Donald Trump announced he was pushing for the sale to Slovakia of nine Bell 429 light utility helicopters, which would result in a $150 million windfall for the defense contractor. Expect to see more such contract wins for Textron from the current administration, which has vowed to bolster military spending. Look for it to also benefit from commercial aviation sales as well, especially in China, which has promised to invest heavily in the industry with plans to build out as many as 500 regional airports by 2020.

Aside from its military pedigree, Textron recently became even more of a direct competitor to Polaris following the acquisition of Arctic Cat, a major manufacturer of snowmobiles, ATVs, and side-by-sides. Italready had a presence in the industry with its billion-dollar specialized vehiclebusiness, which includes well-known brands such as Cushman, E-Z-GO, and Jacobsen, which compete against Polaris' GEM, Goupil, Aixam, and Taylor-Dunn.

The addition of Arctic Cat, however, gives it a bigger wedge in the recreational UTV market dominated by the RZR, as its Wildcat side-by-side enjoyed significant sales traction when introduced and the company has amped up the power and utility of new and different models since.

Image source: Arctic Cat.

Shares of Textron have gained 25% over the past year, though most of the appreciation occurred following Trump's election and the obvious boon to defense spending it would entail. While Textron offers a solid business to buy into, it pays a negligible $0.02 quarterly dividend that yields virtually nothing.

The better buy

Despite Polaris Industries' current troubles, it is the better investment. Where it holds a leadership position in its industry, Textron competes in a very volatile market that suffers from the vagaries of political whim and also puts it up against defense contractor giants. And the V-22 Osprey program has been beset by controversy for much of the two decades it's been built.

Polaris stock also is more attractive, having been beaten back because of its manufacturing issues. While that is a hurdle and risk it needs to surmount, it's quite capable of doing so, and when that happens, the discount its shares offer provides the opportunity for greater gains, not to mention the healthy dividend it pays. In short, Polaris Industries is a better buy than Textron.

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Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Polaris Industries. The Motley Fool has a disclosure policy.