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Motley Fool  Jun 23  Comment 
Now it has to repair its repairs.
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The maker of motorsports equipment has dealt with some challenges lately. Should investors be concerned?
Motley Fool  Jun 9  Comment 
These vehicle makers have basically been left for dead by the market, but with tempting dividend yields and turnaround potential, they could be valuable additions to the portfolios of long-term investors.
Motley Fool  Jun 1  Comment 
Polaris has stumbled over recalls while Textron got a presidential boost. Which company comes out on top for investors?
Motley Fool  May 26  Comment 
It's still the leading powersports vehicle maker and should remain so -- if it can stop tripping over itself.
Motley Fool  May 11  Comment 
Wall Street bid up the powersports vehicle maker's stock, but it might be a bit premature.
Motley Fool  May 9  Comment 
The PR disaster in the wake of the injuries the auto caused led to its cancellation. Does the same fate await the RZR?
Motley Fool  May 1  Comment 
The battle of the big bike makers goes down to the wire.
Motley Fool  Apr 26  Comment 
The motorcycle and off-road vehicle specialist just delivered a deceivingly solid quarter.




 
TOP CONTRIBUTORS

Polaris Industries Inc. (NYSE:PII) is a world leader in the design, manufacturing and marketing of high-quality and innovative motorized recreational and utility vehicles consisting of all-terrain recreational vehicles, utility off-road vehicles, snowmobiles, and motorcycles.[1]

Business Summary

Polaris is a leading producer of motorized recreational and utility vehicles headquartered in Medina, Minnesota, where it was first established in 1956. The company has a very established market within the U.S. and Canada, and is aggressively growing and expanding it's international presence, most notably in Europe and Australia & New Zealand, making up 69% and 14% of sales, respectively. Further breaking down Polaris' international presence, Latin America and the Middle East made each made up 8% of sales, while Asia's Polaris sales were only 1% of total sales, but it looks to expand this very soon.

Polaris' core competencies are highlighted by thier constant dedication to research and development with regards to designing, manufacturing, and marketing top of the line vehicles. Polaris does not directly sell the products to consumers, as this is done by independent certified dealers of the merchandise.

Polaris' products include snowmobiles, all terrain vehicles (ATV's), off-road vehicles ORV's), on-road vehicles, motorcycles, defense vehicles used by the U.S. government, and golf carts. Polaris has been praised as having the highest rate of customer satisfaction by owners for 7 years straight, beating out competitors such as Honda Motor Co., Arctic Cat, and Cycle Country Accessories. In 2010, Polaris achieved record sales of 1.991 billion dollars, as net income rose 46% from the previous year. [2]

Recent Overall Company Highlights

Polaris' Letter to Shareholders highlighting the company's achievements in 2010 pointed out many important accomplishments that the company was able to make:

  • 27% Revenue Growth
  • Gross Profit Margin increased by 1.5%, to 26.6%
  • Net Income Margins improved to 7.4%
  • Increased market share in every product line and region
  • North America dealer inventory decreased 20 percent
  • Hired 51 employees out of the U.S.
  • Engineering and R&D spend increased by 35 percent to $84.9 million
  • Increased it's revenues in new international markets (any region outside of the U.S. and Canada) by 21% to $305.9 million
  • Increased business in China, adding three new dealerships

International Presence

Polaris has for years had a commanding grasp on markets in North America and Europe, and is now looking to further expand international, specifically in Brazil and China. Polaris already has the #1 ORV market in Europe, and would like to expand this across Asia as well. Polaris opened its first dealership in China in 2010, and plans to add 10 more dealerships during 2011. In addition to the ORV market, Polaris will begin introducing snowmobiles to northern cities in China in 2011, and will introduce its Victory Motorcycles to the country in 2012. Polaris was able to achieve 21% growth international in 2010, and aggressive expansion plans have led Polaris to set a goal of raising their concentration of international sales from the 15% that it was in 2010, to 25% in 2014. This would mean total international sales would amount to over $700 million if they achieve this international expansion goal.

Business Segments & Product Portfolio

Business Segments

Polaris' business segments can be broken down into three main categories: Manufacturing & Distribution, Sales & Marketing, and Research & Development.

Manufacturing & Distribution

Polaris has assembly facilities in three locations: their original facility in Roseau, Minnesota, Spirit Lake, Iowa, and Osceola, Wisconsin. As snowmobiles, Off-Road Vehicles (ORV's), and motorcycles use similar assembly techniques, Polaris is able to achieve economies of scale using many of the same personal and equipment to assemble products across their product portfolio. Polaris is also establishing as new facility in Monterrey, Mexico, which is slated to open in mid-2011. This new factory opening will eventually lead to the planned closing of the facility in Osceola, Wisconsin, as costs will be reduced by the addition of their first international facility. Distribution of their products from the factories to the customers through dealerships is outsourced to contract carriers, helping Polaris to remain true to their core competencies.

Sales & Marketing

Polaris' products are sold through a network of nearly 1600 independent dealers throughout North America, and 11 subsidiaries and 43 distributors outside of North America. Polaris sells its snowmobiles directly to its dealers within the 'Snowbelt' region of the United States and Canada, which also carry their ORV's. International distribution of Polaris products is done primarily through distributors who distribute the product throughout dealerships in their regions. In 2002, Polaris was able to acquire assets of their distributor in Australia and New Zealand, thus increasing their profit margin and control in these areas. In 2006, Polaris entered into a contract with GE Money Bank, which allows financing and credit to customers buying Polaris products, which leads to increased sales, and a share of interest revenue going to Polaris from each financing plan.

Research and Development

Polaris has approximately 390 employees who are engaged in researching and developing, as well as the engineering of Polaris products. R&D and engineering is done in three locations between Roseau and Wyoming, Minnesota, and Burgdorf, Switzerland. Polaris claims they were the first ones to develop several key innovations for snowmobiles. These include independent front suspensions for snowmobiles, long travel rear suspensions for snowmobiles, liquid cooled snowmobile brakes, hydraulic brakes for snowmobiles, and the three cylinder engine in snowmobiles. Approximately $84.9 million was spent on research and development in 2010, compared to $63 million in 2009 and $77.5 million in 2008.[3]

Product Portfolio

Off-Road Vehicles

Polaris has been in the ORV market since 1985, when it produced its first 3-whell All-Terrain Vehicle (ATV), which has since been upgraded to the more stable 4-wheel version of the ATV. Polaris has been manufacturing and marketing its youth ATV wince 1998, and its innovative RANGER utility side-by-side vehicle. Featured below are a picture of the Polaris Sportsman XP 850 ATV, and the Polaris Ranger Crew 800 Side-by-side Vehicle.

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Snowmobiles

Polaris offers a very large range of 26 different snowmobile models, ranging from youth models to large utility models, and price ranges from $2,500 to $12,000. These models are sold almost entirely in the U.S., Canada, and Europe. Polaris has a long-standing reputation of providing the highest quality in snowmobiles, with several innovative characteristics being developed, such as an independent front suspension and hydraulic disc brakes. Below is a picture of the Polaris' very popular 600 Switchback Adventure Snowmobile.

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On-Road Vehicles

Polaris entered this market in 1998 when it manufactured the V-twin cruiser motorcycles, named Victory. Polaris introduced its first luxury motorcycles in 2008, and now has 12 different models of on-road vehicles, ranging from $12,500 to $28,000 in retail price. Below is a picture of the Polaris Victory Vegas 8-ball Cruiser

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Parts, Garments, and Accessories

Polaris manufactures a full line of replacements parts for its products, as well as additional garments and accessories available for purchase. This product line makes up nearly one fifth of Polaris' sales in a given year. Recently bought GEM clothing company.

Percentage Breakdown of Product Sales

Polaris' annual sales for the last three years have been dominated by their Off-Road Vehicles, which is no surprise because Polaris has been in this market since 1985, and has a large variety of ORV's for consumers to choose from. Polaris is well known in the ORV industry with its exceptional quality products from the ATV to the Ranger side-by-side vehicles, leading ORV's to account for over two-thirds of Polaris' sales on a consistent basis. Parts, garments, and accessories are the second largest sales force, as customers find the need to purchase accessories for their vehicles, and the nature of recreational vehicle use leads to a high need for replacement parts. Snowmobiles take up a smaller market share, which can greatly be attributed to a limited geographical area and climate where these vehicles are used. Lastly, the Victory motorcycle in the On-Road Vehicle category is a relatively new product to Polaris, and other industry leaders such as Harley-Davidson cause Polaris' motorcycle sales to be relatively low.

Below are three pie charts which breakdown annual sales by segment for the years 2010, 2009, and 2008.

Image:PII2010.JPG Image:PII2009.JPG Image:PII2008.JPG

Strategic and Competitive Landscape Analysis

Competitors

When considering overall competitive landscape of the recreational and utility vehicle industry, one must first examine the overall saturation of companies in this market. Including ORV's, ATV's, snowmobiles, and motorcylces together, there are only a handful for competitors currently in these markets, including Arctic Cat (ACAT) (founded by Polaris founder Edgar Hetten), Bombardier Recreational Products (Cam-Am ATV's, Ski-Doo and Lynx snowmobiles), Harley-Davidson (HOG), Cycle Country Accessories (ATC), and Honda Motor Company (HMC). Only two of these companies, Arctic Cat and Polaris, have concentration in both the snowmobile and the ORV market. [4] With respect to the motorcycle industry alone, Honda and Harley Davidson are the only two of these companies which focus on this market alone, and not on ORV's or snowmobiles, while Cycle Country Accessories focuses on ORV's only. [5]

Porter's Five Forces Model

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Threat of New Entrants

When looking at the players that make up the recreational and utility vehicle market, Polaris takes part in a larger number of segments than most of its competitors. Many of the other names, take Harley-Davidson for example, only produce motorcycles and their related accessories. This can largely be attributed to very high capital requirements to enter into the recreational vehicle markets. Large expenditures are needed to develop the facilities required to build just one vehicle, and research and development costs associated with the design of these products are also very high.

High costs associated with these products leads to the effect that recreational vehicles fall amongst the higher priced methods of entertainment. Many of these products, such as ORV's and utility vehicles can be used for both commercial and recreational use, while snowmobiles and motorcycles are almost always recreational vehicles, with the exception of certain public saftey and government uses and the larger snowcats made by Bombardier Recreational Products.

Being classified as high priced recreational vehicles requires a large amount of disposable income to purchase, thus shrinking its potential customer base. Also, items such as snowmobiles and All Terrain Vehicles require certain climates and a large amount of open terrain or wilderness to be used. Many of these areas are actually shrinking as population rises and people are always continuing to expand and build cities in areas that were once bare land.

The high capital requirements, research and development costs, price, as well as the limited usage and nature of a niche market for these recreational vehicles makes it appear as a market that will not grow at a very fast rate. This would make the industry un-attractive to other companies that are considering entering this market place. Perhaps the only other types of companies that would be able to compete with the required engineering advancements would be the large automobile makers, but with recent conditions in that industry, expansion into recreational vehicles seems very unlikely.

All of these drives signal a Very Low Threat of New Entrants to the market.

Threat of Substitute Products

Substitutes for these recreational and utility vehicles are almost non-existent, as the unique designs and functions of these product are what drives this marketplace. It would be far-fetched to attempt to argue that any vehicle that can transport people is a substitute for a motorcycle, mostly because the rider is looking for the experience that riding a motorcycle offers, not the ability to travel. ATV's, ORV's, and snowmobiles have unique capabilities that not even the most heavy duty automobiles can accomplish, concluding that there are no substitutes for these products. However, personal watercraft (PWC) can provide similar recreational experiences for the existing customers of ATV's or snowmobiles. The largest suppliers of PWC's are Kawasaki Heavy Ind (TYO:7012) (Jet Ski), Yamaha Motor (TYO:7272) (WaveRunner), and Bombardier Recreational Products (Sea-Doo), while Polaris has not offered any PWC's. There is potential risk that in the future some customers may develop more interest in PWC's and reduce demand for land-based products made by Polaris.

Substitutes in this industry are basically non-existant, creating a Very Low Threat of Substitutes.

Bargaining Power of Buyer

With a small number of companies to choose from in any of the subcategories of the recreational and utility vehicle industries, there is a much better chance that a consumer will end up choosing Polaris. Polaris' strong brand identity and large international dealer network helps them to dominate much of the market for snowmobiles, ATV's, and ORV's. The small number of players in the recreational vehicle market leads to a somewhat limited variety of companies to choose from for buyers. However, these companies offer a large variety of products, as Polaris alone offers 26 current snowmobile models with prices ranging from $2,500 to $12,000. Even though there is a limited number of competitors in this industry, with the large variety of products available to consumers, and the fact that the vast majority of products are for recreational use only gives the buyer the option to either find the right product for them, or simply walk away from the product. These factors drive the Bargaining Power of the Buyer to be High.

Bargaining Power of Suppliers

Polaris has a relatively concentrated number of suppliers that it has fostered long relationships with. Polaris has high standards for external suppliers, and when Polaris chooses a supplier, they have done so because of the exceptional quality, and will continue to innovate and grow their product line along with the supplier. Polaris has also been acquiring several of its suppliers through vertical integration for many years, and has also done so very recently. This gives Polaris more control over its supply chain and a larger share of overall profits from the industry. Strong standards in this industry and vertical integration through the supply chain by Polaris drives the Bargaining Power of Suppliers to be Low. [6]

Competitive Rivalry within an Industry

All of the above forces in Porter's model help to create the current condition of the competitive rivalry within this industry. With a small number of competitors within the larger recreational and utility vehicle industry, many of the market players have found their specialties and strengths. Polaris is in several of the the market subcategories, but continues to focus on its strongest products lines, Off Road Vehicles and snowmobiles. This is an industry that has slim chances to add new competitors given the current state of the economy and the high capital requirements needed to enter. The industry overall faces steady growth in good financial times, and has a small chance of shrinking overall, but also a small chance of seeing a booming expansion. Polaris' strong brand identity gives them an edge in the products they produce best, as well as other competitors such as Harley-Davidson also have their well established brand name for their premier products. With only a few competitors in an industry that appears to see steady growth, but limited growth in the number of market players, the overall Competitive Rivalry within this industry can be classified as Moderate.

SWOT Analysis (Strength, Weakness, Opportunity, Threat)

Internal Factors Factors which the company has direct control over

Strengths Polaris has a large market saturation within the recreational and utility vehicle industry by manufacturing Off Road Vehicles's, ATV's, Snowmobiles, and Motorcycles. Their strong brand recognition in many of these categories, most notably their dominance in the snowmobile and ATV market, gives them a large boost as a company. Much of this strong brand recognition is achieved because Polaris has been a leader in the industry for a very long time, and has amongst the best engineering and R&D in the industry.

Weaknesses Polaris is very spread out in terms of product lines that it offers, so much that it may actually hurt profitability. As Polaris has only recently entered the motorcycle industry, they have not been able to achieve a relatively successful market presence when compared to the market leaders. Harley-Davidson and Honda Motors have a much more established name in the motorcycle industry as they focus on fewer product lines, rather than attempting to produce products in every subcategory of the recreational vehicle industry.

External Factors Environmental factors which the company has virtual no control over

Opportunities An expanding global economy gives Polaris the opportunity to further expand its international market. Polaris has been targeting European markets for several years, but is now expanding its presence to emerging markets, most notably the quickly growing economies of Brazil and China.

Threats Some of the threats to Polaris and this industry overall would be the overall state of the economy. When the economy is struggling, the recreational vehicle industry is affected more than many industries due to the higher price of their products and the need for customers with disposable income. Other current economic factors that threaten Polaris' sales would be the near record high price of oil and gasoline world-wide. As customers are aware that using these vehicles could become more expansive, they may be deterred from purchasing these vehicles at all.

Financial Performance

2010 was a monumental year for Polaris Industries, achieving record sales of $1.991 billion and achieving a 46% increase in net income from the prior year. This rise in net income was achieved not only by an increase in sales from the previous year (Sales Chart below) but also an improvement of net margin from 6.9%, to 7.4%. Over the last ten years, Polaris' sales have seen an over-all steady upward trend. Fiscal year 2009 proved difficult for Polaris, just as it was for the entire economy, as sales from 2008 to 2009 show a large decline. However, Polaris was able to bounce back in 2010, recovering from the recession and a short lived decline in sales to achieve record sales and profits.

PIISales.jpg

Financial Performance Comparison

Polaris's position within the recreational and utility vehicle industry allows it to compete with every company in the industry on various levels. The two closest competitors of Polaris are Arctic Cat, specializing in snowmobiles and ATV's, just as Polaris, and Harley-Davidson, motorcycle manufacturer. Since these are companies of different size and market saturation, certain financial metrics are better than others for comparison. Total Sales is featured in the chart below to give investors a better idea of where these companies fall in terms of revenue earned. Gross Profit Margin from the most recent year will show potential investors what percentage of revenue is left after all expenses are paid. The 5-year Annualized Revenue Growth Rate will give investors a picture of how each company has performed during a larger time horizon. [7]

Image:PIICompetitorsRatios.JPG

Analysis

Analyzing Total Sales, Harley-Davidson is clearly the largest company amongst the three in terms of sales, and this is done through being the worlds largest motorcycle manufacturer, and is also boosted by large merchandise and apparel sales. However, Polaris has much more in common with the also Minnesota based Arctic Cat in terms of product lines and market focus. Comparing sales of the two companies, Polaris quadruples its competitor, showing Polaris to be the much larger company within the industry. In terms of profitability, all 3 companies generate consistent profits, but it appears that the manufacture and sale of Off Road Vehicles and snowmobiles is more profitable on a margin basis. Polaris, with its record setting year in 2010 leads this category with 26.6% Gross Profit Margin, faired slightly better than its main competitor. [8] The final financial metric in this chart looks back five years to show the 5-Year Annualized Growth Rate. This metric will compare how well these companies faired during the recent recession, along with the short time before the recession also factoring in. The only company of these three competitors that has averaged a growth in revenue is Polaris, although a gain of 1.27%, it is better than an overall decline in revenue for the 5 year time period. [9]

Human Resources

During 2010, Polaris had an average of 3,000 full-time employees, with 1,300 of those being salaried positions. Polaris' employment has been non-unionized since 1982.

Corporate Governance

Scott W. Wine Chief Executive Officer, Director

  • 2010 Total Compensation: $3,621,780
  • Since: 2008

Bennett J. Morgan President, Chief Operating Officer

  • 2010 Total Compensation: $2,483,870
  • Since: 2005

Michael W. Malone Chief Financial Officer, Vice President - Finance

  • 2010 Total Compensation: $1,580,110
  • Since:2010

William C. Fisher Vice President, Chief Information Officer

  • Since: 2007

David C. Longren Vice President, Chief Technical Officer

  • Since: 2007

Stacy L. Bogart Vice President, Compliance Officer

  • Since: 2010

Michael P. Jonikas Vice President, Sales and Marketing

  • Since: 2009

John B. Corness Vice President, Human Resources

  • Since: 1999

Michael D. Dougherty Vice President, Global New Market Development

  • Since: 2008

Scott A. Swenson Vice President, Snowmobile and PG&A

  • Since: 2007

[10]

References

  1. Polaris Homepage 4/22/11
  2. Polaris Products 4/22/11
  3. Polaris Annual Report.net 4/22/11
  4. Arctic Cat 4/28/11
  5. Harley-Davidson 4/28/11
  6. Polaris Suppliers 4/28/11
  7. Polaris Proxy Report.net 4/25/11
  8. Arctic Cat Annual Report 4/28/11
  9. Harley-Davidson Annual Report 4/28/11
  10. Reuters: Polaris 4/29/11
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