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Bear of the Day: Polaris Inc (PII)

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While sales of motorcycles and other recreational equipment had recently been on the rise in the U.S. thanks to a strong economy and record-low unemployment, the nationwide shutdown has thrown the industry into a tailspin.

Polaris Industries (PII - Free Report) manufactures and sells Powersports equipment primarily in the U.S. including Motorcycles, Off Road ATVs, Snowmobiles and a wide range of parts and accessories. Through its brands Polaris, Ranger RZR and Indian motorcycles, Polaris is far and away the leader in sales of powersports equipment in North America.

In Q2 2019, Polaris earned $1.73/share - and until two months ago, the Zacks Consensus Estimate for the second quarter of 2020 was expected to be 19% higher at $2.06/share.

Then the lockdown hit.

Motorsports equipment is a quintessentially cyclical industry. When the economy is humming along, unemployment is low and wages are rising, Americans love to buy new toys – especially loud, fast toys. Along with recreational boats, motorsports equipment is one of the most popular “splurge” purchases when consumers begin to feel wealthy.

With more than 30 million Americans filing for unemployment over the past six weeks and more claims expected – along with stock market indices that are still more than 10% off recent highs – few potential consumers are feeling particularly rich right now.

As they stretch to make their savings and perhaps some government assistance cover basic day-to-day expenses like food, housing and health care, those consumers are extremely unlikely to splurge on a luxury purchase like a snowmobile or ATV.

In fact, for someone who has recently found themselves unemployed with an uncertain timeframe for when they might expect to begin getting a paycheck again, they’re much more likely to try to sell their existing equipment to raise cash than to buy something new.

In tough times, that market actually works against the company because the variety of used equipment available allows potential customers to pick up their desired machine in lightly-used condition and at a significant discount to MSRP. 

It could be a long time until those customers are back in the showroom with a checkbook in hand.

That $2.06/share net earnings estimate for Q2 has tumbled all the way to just $0.63/share. The consensus estimate for full-year 2020 fell from $6.96/share to $3.50/share over the past 60 days.

Polaris is a Zacks Rank #5 (Strong Sell).

Polaris shares had been down more than 60% YTD, hitting a closing low of $39/share in early April. Those shares rallied on some surprise growth in motorcycle sales in the first quarter, despite sales contraction across all other divisions and a big miss of net earnings estimates, closing at $75.07 on April 29th - but settling back to near $68/share recently.

The first quarter included only a small portion of the Covid-19 panic. In the luxury motorsports industry, things are almost certainly going to get worse before they get better. Polaris is a company you want to own in the boom times, but there are a lot safer places for your investment dollars in the face of what could be a deep recession.

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