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Bear of the Day

When a manufacturer decides to recall a product there is a problem, but when a company issues a recall, and a stop-ride/stop-sale advisory there is a huge problem with the product.  And if the underlying issues are not fixed quickly enough, both the top and bottom lines are bound to suffer.  This is what happened to our Zacks Bear of the Day Polaris Industries (PII - Snapshot Report) .  Due to recalls and stop sale advisories Polaris was forced to make extensive reductions to their FY 2016 guidance.

This Zacks Rank #5 (Strong Sell) designs, engineers and manufactures snowmobiles, all-terrain vehicles, motorcycles and personal watercraft and markets them, together with related replacement parts, garments and accessories through dealers and distributors. The company's line of all-terrain vehicles consist of fourteen models includes general purpose, sport and four-wheel drive utility models. The company produces a full line of snowmobiles, consisting of thirty-three models, ranging from utility and economy models to performance and competition models.

Declining Guidance

Because of thermal-related RZR issues, and more complex and extensive repair solutions, management was obligated to update their full-year guidance.  Management adjusted FY 16 EPS guidance to a range of $3.30-$3.80 after expecting a range of $6.00-$6.30.  Further, management also negatively revised revenue guidance for FY 16 as well; revenues are now expected to decline in the mid/high single-digits, after expecting flat to -2.0% previously.   

Management’s take

According to Chairman and CEO Scott Wine, “Our number one priority is to get our loyal owners back to riding safely. We share the frustration of our customers and dealers and we are working diligently to expedite the completion of the recall repairs and significantly improve the quality and safety of our products. We are providing increased support to our dealers and RZR owners so they can complete the necessary repairs with minimal disruption.”

“We have engaged outside engineering experts to help accelerate the remediation process, we are sending additional repair technicians into the field to assist our dealers, and we have created a new independent safety and quality function reporting directly to me. Additionally, we are pleased that the vast majority of our model year 2017 products have begun shipping, after undergoing a thorough internal and external review to identify and address any potential safety risks. While we are disappointed with our recent performance, our team is aggressively driving improvements that will make Polaris a better and stronger company.”

Price and Earnings Consensus Graph

Due to the stop-sale and recall issues, earnings estimates have been significantly trimmed.

Declining Estimates

Due to the reduction in guidance estimates for Q3 16, Q4 16, FY 16 and FY 17 have all seen significant declines over the past 7 days; Q3 16 collapsed from $2.11 to $0.63, Q4 16 fell from $2.12 to $1.31, FY 16 was almost cut in half $6.03 to $3.49, and FY 17 dropped from $6.94 to $5.44.

Bottom Line

Due to the recalls and stop-sale issues, the next few months are going to be very difficult for Polaris.  On the positive side management has recently started to ship the 2017 models with extra internal and external reviews to ensure these recall issues can be contained going forward.  

If you are inclined to invest in the Leisure and Recreational Products segment, you would be best served by looking into Smith & Wesson (SWHC - Snapshot Report) which carries a Zacks Rank #1, and or Marine Products (MPX - Snapshot Report) who currently holds a Zacks Rank #2 (Buy).

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