EUR 850.00 For Business Accounts Only

Morningstar | Tariff Expenses Pressure Polaris’ Profit, but Market Share Gains Indicate Brand Is Intact

Polaris is one of the longest-operating brands in powersports. We believe that its brands, innovative products, and lean manufacturing yield the firm a wide economic moat and that it stands to capitalize on its research and development, improving quality (on the mend after prior setbacks), operational excellence, and acquisition strategy. However, Polaris' brands do not benefit from switching costs, which makes it hard to capture incremental share in the off-road segment, as peers are innovating more quickly than in the past, jeopardizing the company's ability to easily take price, particularly in periods of inflated recalls.Similar to during the acquisition of TAP, we expect Polaris to sacrifice some financial flexibility after financing its acquisition of Boat Holdings, but we think higher than historical debt-service metrics will be worked down fairly quickly through faster EBITDA expansion and cost-saving scale benefits (with debt/adjusted EBITDA falling below 1.5 times in 2021). We anticipate the resumption of consistent low-single-digit top-line organic growth in 2020 and beyond (after lapping the Boat Holdings tie-up), as opportunities in the motorcycle and global adjacent markets are capitalized on, offsetting secularly slower growth in ORV and snowmobiles. International (about 15% of sales) expansion also remains promising and could drive revenue upside, particularly as Polaris increases its global operating presence with a wider physical presence and partnerships with peers abroad. Additionally, we think acquisition opportunities (not explicitly included in our forecast) remain across the global adjacent and afterparts markets, which can build incremental demand. With sizable ORV recalls and delayed shipments largely behind us, we think Polaris has stabilized brand goodwill in the ORV segment, helping support segment growth potential and keep the firm's brand intangible asset in place. We plan to watch market share trends unfold to ensure market share stabilization persists, signaling the firm's competitive edge is intact.