Why Polaris Industries Stock Dropped 17% in May

What happened

Shares of Polaris Industries (NYSE: PII) lost 17.1% last month, according to data provided by S&P Global Market Intelligence.

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The maker of motorcycles and off-road vehicles has put up solid numbers on the top line lately, but new tariffs on Chinese goods, which went in to effect on May 10, caused investors to hit the sell button last month. Polaris is facing increased costs because the company relies on suppliers in China for manufacturing its products.

So what

In early May, Polaris CEO Scott Wine told CNBC that the higher tariff would be "catastrophic" for the company. The company had guided for $80 million to $90 million in extra costs this year relating to the 10% tariff previously placed on imports from China. But a 25% tariff would cut the company's net profit by a third, according to Wine.

Now what

Wine explained that the company has options to mitigate the costs, such as moving production to Mexico. However, the Trump administration has recently proposed a 5% tariff on Mexican imports, but that is much less than the tariff on China.

Meanwhile, Polaris is working to mitigate some of the cost. On the last conference call, Wine said that they were experiencing "excellent momentum with the strategic sourcing initiative and should drive many more quarters of accelerating savings." He added, "We are still working to eliminate our significant tariff impact, but in the interim, we are making progress mitigating the associated cost."

Currently, analysts expect Polaris to report earnings of $6.16 per share in 2019, down from $6.56 last year, while revenue is expected to increase 11.6% to $6.79 billion.

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