Polaris Industries Inc. (PII) recently delivered its 18th consecutive positive earnings surprise on record sales and profits.
Earnings estimates have been soaring after management raised its guidance for the remainder of 2011. It is a Zacks #2 Rank (Buy) stock.
In addition to strong earnings growth, Polaris pays a dividend that yields a solid 1.5%. It has raised it at an average annual rate of 14% since 2000.
The valuation picture looks reasonable too, with shares sporting a PEG ratio of 1.1.
Company Description
Polaris is a leader in the powersports industry. The company manufactures off-road vehicles (ORVs), including all-terrain vehicles (ATVs) and snowmobiles, and on-road vehicles, including motorcycles and electric powered vehicles.
The company is headquartered in Medina, Minnesota and has a market cap of $4.1 billion.
Third Quarter Results
Polaris reported better than expected results for its third quarter on October 18. Sales surged 26% year-over-year to $729.9 million, well ahead of the Zacks Consensus Estimate of $697.0 million. The increase was driven primarily by sustained market share gains.
Sales growth was strong across all product lines and geographies. International sales were particularly strong, rising 59% year-over-year.
Polaris saw meaningful margin expansion in the quarter too. Gross profit as a percentage of sales expanded 230 basis points to 28.3%. Meanwhile, the company leveraged its fixed expenses and generated a 63% increase in operating income. The operating margin improved 340 basis points to 15.1% of sales.
Earnings per share came in at 95 cents, beating the Zacks Consensus Estimate by 9 cents. It was a stellar 38% increase over the same quarter in 2010.
Raised Guidance
Management raised its guidance for the remainder of 2011 following strong Q3 results. The company now expects to earn between $3.10 and $3.16 per share on sales growth of 30-32%, up from previous guidance of $2.97 to $3.03 per share on sales growth of 25-28%.
This increased guidance prompted analysts to revise their estimates higher for both 2011 and 2012, sending the stock to a Zacks #2 Rank (Buy). When you take a look at the company’s Price & Consensus chart, you can see that earnings estimates have been trending significantly higher over the last several months:
Based on current consensus estimates, analysts project 49% EPS growth this year and 19% growth next year.
In its third quarter press release, management stated that it expects the overall economic climate to remain challenging in 2012. However, it believes it can offset these headwinds through product innovation and seizing additional opportunities to sustain its momentum.
Although growth may not be as robust as 2011, the company expects to have another year of increasing sales and earnings per share.
Solid Dividend
In addition to strong growth, Polaris offers investors a dividend that yields a solid 1.5%. Since 2000, the company has raised its dividend at an average annual rate of 14%:
Reasonable Valuation
The valuation picture looks very reasonable for Polaris. Shares trade at 16.3x 12-month forward earnings, a slight premium to the industry average of 15.5x. But this premium seems more than justified given the company’s strong growth projections.
It sports a PEG ratio of 1.1 based on a 5-year EPS growth rate of 15.0%.
The Bottom Line
With surging sales and earnings, rising estimates, a solid dividend and reasonable valuation, Polaris offers plenty of upside potential.
Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Co-Editor of the Reitmeister Value Investor.
