Polaris Industries risks having its reputation going up in flames if it doesn't correct the "thermal issues" with its popular RZR off-road vehicles. Image source: Getty Images.
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How did Polaris Industries (NYSE: PII) stray so far off the path? The leading off-road vehicle manufacturer is mired in a morass of its own making as its once-popular RZRs are caught in an endless spiral of recalls related to fire hazards. As a result, Polaris slashed full-year earnings guidance by almost 30%, but that was before it had to issue yet another recall on Thursday -- the second one this month it was forced to announce.
Where there's smoke...
On Monday, Polaris said because it continued to suffer from the same "thermal-related issues" that have dogged it for the past year and that it has been unable to fix, it was lowering its earnings guidance for 2016 from its its previous range of $3.30 to $3.80 per share down to $2.50 to $2.70 per share. Not only were sales of existing vehicles being dragged down, but it was delaying shipments of its 2017 models to make sure they didn't also spontaneously combust on owners.
Polaris Industries' problems began in earnest last October when it was forced to recall 53,000 model year 2015 RZR 900 vehicles because of a potential fire hazard, which expanded in April to include all 133,000 vehicles manufactured after 160 reports of fires were received, including one that resulted in the death of a 15-year-old girl following a crash. In between and since, additional models have been added to the recall list because of similar "thermal-related issues," including the one it issued this week that saw all 42,500 model year 2014 Ranger XP 900, XP 900 EPS, and Crew 900 ORVs recalled. On Sept. 1, Polaris also recalled about 13,000 model year 2016 RZR XP Turbos and RZR XP 4 Turbos.
Reputation at risk
Polaris Industries stands on a precipice. Its popular RZRs have been the industry leaders almost since they were introduced in 2007. They were the first off-road vehicles that conformed to the 50-inch maximum vehicle width regulations to ride on trails on federal lands, and Polaris was quickly catapulted to the industry forefront, where it remains today. But the recalls are taking a toll, and CEO Scott Wine admits it is losing share in the side-by-side market. Perhaps not enough yet to be worrisome, but even Wine says it is unacceptable.
Yet the executive had also assured investors and buyers that Polaris had the problem in hand. After its massive recall in the first quarter, Wine said the company had developed repair kits and figured Polaris would be able to fix all the vehicles that needed it by the end of the second quarter. He followed that up by saying the off-road vehicle (ORV) maker had reviewed all of its operations and "discovered gaps in our design, development, and manufacturing processes" it was determined to fill in.
The problem is, it's now clear the holes weren't backfilled and the fix it thought it had to address the problem wasn't the right one. In the earnings revision guidance, it admitted the issue was tougher than it imagined and required "a more complex and expensive repair solution." Polaris risks hurting its reputation by the cycle of recalls it's caught in and by promising repairs that didn't do the job. It may have finally started shipping the vast majority of its 2017 model inventory, but it's going to take a lot to convince buyers they should purchase them.
A smoldering problem
About the only thing Polaris has going in its favor is the entire ORV industry is weak.If Polaris was going to have this problem, it could arguably be said this was a perfect time to have it, because no one is buying vehicles anyway.
In its own second-quarter earnings report, rival Arctic Cat (NASDAQ: ACAT) said segment sales tumbled more than 17% from last year (though sales of its competitive Wildcat side-by-side was reportedly strong).
And that's why Polaris Industries stock isn't a buy yet. Not only do its vehicles have some big hurdles to get over in terms of repairs and company credibility, but the industry is in decline, brought on in no small part because of falling oil prices. Oil patch states comprise a big piece of Polaris Industries' sales.
A lit match
Yet ORVs aren't the only problem. Motorcycle sales are slowing, too. While Indian Motorcycles may still be the fastest-selling bikes out there, and its Victory brand finally turned positive, that industry is sagging as well, as Harley-Davidson's earnings can attest. While Polaris' global adjacent markets did see sales growth, too, it's a very small segment and its gross profits sunk by 210 basis points last quarter.
Polaris Industries has lost more than 40% of its value in the past year, and though its stock looks cheap across many metrics, it's hard to say where the bottom will be. What is clear is that investors risk being burned if they try to buy in beforeit finally douses its "thermal-related issues."
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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.