Polaris Industries (NYSE: PII) made its mark on the powersports vehicle industry in 2007, when it introduced the RZR 800, which revolutionized the utility task vehicle (UTV) market. Not only did it make a UTV that was decidedly sport-oriented, but it also conformed to federal trail-width regulations that allowed it to go where "utes" had previously been prohibited.
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The RZR changed everything, and Polaris quickly came to own the market, a position it still holds today. In fact, the RZR's market share is more than double all the other competitors combined.However, Polaris is more than just one UTV, and off-road vehicles (ORVs) account for 66% of total sales.Let's take a closer look at how important ORVs are to Polaris, and why their success may also carry risk.
Image source: Polaris Industries.
Off the beaten path
In addition to the RZR, Polaris also makes the wildly popular Ranger, which -- like its sister UTV -- commands double the market share of its largest competitor. Together with its other ORVs, Polaris generated over $3 billion in sales in 2016, but that was down 9% from the year-ago period as industry weakness and a procession of vehicle recalls weighed on the powersports vehicle manufacturer.
Because these types of rugged vehicles are used extensively in the oil, gas, and agricultural industries, the collapse in commodity pricing, particular energy prices, dragged down the ORV market as a whole. In an investor conference presentation last month, Polaris noted the oil and gas market for ORVs was down by mid-teen percentages last year, while ag markets were off by mid-single-digit rates. The outlook for the current year indicates those markets will continue to be soft, but an earnings presentation last month also indicated the fourth quarter was especially tough on the company, as its ORV retail sales were down by mid-single digits compared to the industry having flattened out in the period.
Recalling better times
That was due to all the recalls Polaris suffered, and not just in its ORVs, for which there were bunches, but really across almost all of its product lines. It issued 13 safety bulletins last year and had to take a charge of around $120 million for warranty and legal costs as a result. That led to a loss of 2 percentage points in market share. Admittedly, though, when you have double the market share of your competitors, a two-point decline isn't fatal, but it's a problem that can't be ignored.
Image source: Polaris Industries.
Unfortunately, Polaris' recall problems aren't behind it, as it issued two new ones earlier this year, and just this month issued two more. The possibility of additional recalls remain high. The powersports vehicle maker is going over its manufacturing processes with a fine-tooth comb and it's likely the review will mean it will find more problems. It's a proactive move on Polaris' part, but it risks adding to the conga line of recalls and further damaging its reputation for quality and reliability.
A matter of trust
So it's obvious what the potential fallout is for Polaris. With such a large portion of its revenue tied to the off-road vehicle market, investors may suffer from further erosion of trust in the brand. Its stock is down 10% over the past year, but that incorporates the 17% bounce it enjoyed off its 52-week lows, so things were a lot worse -- and they could get that way again if the problems persist.
Polaris, however, has done a lot to diversify its revenue streams. One of the main ways was the resurrection of the Indian Motorcycle nameplate out of bankruptcy, which quickly became the powersports vehicle maker's second-largest source of income, generating $708.5 million in revenue last year. It's retiring its Victory brand and focusing all its attention on Indian, which ought to allow it to take market share from industry leader Harley-Davidson.
And last year Polaris entered the aftermarket parts and service business with its acquisition of Transamerican Auto Parts, giving it a leading position in the aftermarket accessories business for trucks and Jeeps.
Still, those segments will not supplant ORVs as the main moneymaker for Polaris Industries, so investors will need to keep their eye on just when and how it moves beyond this recall morass. It should be a transient issue in the long run, but it's one that's gone on far longer than was originally expected. So far it hasn't undermined faith in the company or its products, and there is a chance it will be an even stronger company when it comes out on the other side.
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