EUR 850.00 For Business Accounts Only

Morningstar | Healthy Legacy Segment Results Imply Brand Equity Remains Strong at Wide-Moat Polaris

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 (which has stabilized 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 or aggressive industry discounting.Similar to during the acquisition of TAP, Polaris has sacrificed some financial flexibility after financing its purchase 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 trending down from 2018's 2.3 times ahead). 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 after part and global adjacent markets are capitalized on, offsetting secularly slower growth in the leisure businesses (particularly, ORV, snow, and motorcycles). 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 abroad (which could be strained in the near term given the political climate). Additionally, we think acquisition opportunities (not explicitly forecast) remain across the global adjacent and aftermarket parts segments, which can build incremental demand. With ORV recalls and delayed shipments well 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.