Follow the dividend investment decisions of a person who has no background in financial investment and wishes to take control of their financial future.

Polaris Industries (PII) - 31 May 2016 21:45

Tags: pii polaris_industries stock_review_2016

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Polaris Industries (PII), the maker of Indian Motorcycles, has been on my radar screen the last 6 months and my recent experience of seeing (and riding) an Indian Scout motorcycle has motivated me to perform a more detailed analysis as a dividend growth company and it also became a worthy addition to my watch list.

PII is best known for producing off-road vehicles and snow-mobiles and as such remains it bread and butter for revenue and earnings.

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Over the last six years PII has also moved into the motorcycle market with its Victory, three wheeler Slingshot and the more recent Indian Motorcycles which it acquired the rights to in 2011 and introduced their first models in late 2013.

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PII’s latest market venture is into a sector they refer to as Global Adjacent Markets. This new venture focuses on vehicle to be sold globally that specialize in moving people and supplies. This is a new strategy for PII as their other markets are dependent on consumer discretionary spending but the global adjacent market is dependent on commercial and industrial spending which is a slower growth but more stable market. While some may disagree with their latest investments I believe it to be prudent to help even out earnings during the peaks and valleys of consumer discretionary spending.

In regards to competition, PII’s chief competitor is CAN-AM and to a lesser degree Artic Cat (ACAT) and Harley Davidson (HOG). There are smaller competitors but when it comes to off-road vehicles the three top names in the business are Polaris, CAN-AM and Arctic Cat. Some would argue that Harley Davidson should be on this list due to PIIs entry into the motorcycle market but PII’s $0.7B annual revenue is nowhere close to HOG’s annual revenue of $6B. Possibly one day in the future they may be head to head competitors but for now PII has a long way to go.

As a dividend grower PII has been paying and growing their dividend for 21 consecutive years with a 10 year CAGR of 14.56%. As impressive as their historical growth has been their most recent increase was only 3.77% which may or may not indicate future problems.

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Like any investment we shall perform the due diligence of analyzing PIIs annual financial statements to understand if the dividend is on solid ground and opportunities for dividend growth.

Note: The following financial analysis is based on PII’s 2015 annual report.

Liquidity

2015 2014 2013
Current Ratio 1.4 1.29 1.02
Quick Ratio .37 .4 .33
Days to Collect Receivables 11.68 16.7 17.97
Days to Sell Inventory 76.67 65.38 57.44
Liquid Current Assets $306M $342M $278M
Long Term Debt $439M $200M $281M

The quick ratio is of mild concern as it is dependent on liquid assets (cash, cash equivalents, and accounts receivable). If the company experiences a significant downtrend greater than six months this could cause an issue. But their ability to improve how many days it takes to collect receivables has improved dramatically over the last three years and this does offset some concerns.

The Days to Sell Inventory measure is also one of concern as that number has consistently trended upward. Digging into the annual report, the issue with inventory lies with their production facility in Spirit Lake Iowa which cannot meet demand. PII has recently opened a new facility in Huntsville Alabama which should reduce some of the demand at the Spirit Lake facility in the second half of 2016. If inventory numbers do not improve then it may signal more hidden problems in their manufacturing and assembly operations.

Profitability

2015 2014 2013
Revenue Growth Rate 5.33% 18.61% 17.66%
Operating Expense Ratio 15% 15% 16%
Net Income as a % of Sales 10% 10% 10%
Return on Assets 19% 22% 23%
Cash Used for Investing $289M $247M 407M
Free Cash Flow $151M $282M $85
Dividend $139M $127M $114M
PII has solid profitability measures all around but if we had to pick on one it would be growing the revenue by only 5.33% in 2015. PIIs revenue stream was impacted by two factors. The first is a slowdown in sales of Off Road Vehicles (ORV). As shown in the chart below, the ORV segment has slowed down and even retreated a bit in 2015. This slowdown did not just impact PII but the industry as a whole with competitor ORVs experiencing the same downturn. PII has recently issued their 2016 first quarter earnings and ORVs sales were down from last year and may be a forbearer to overall lower 2016 revenue for the segment.
Segment Revenue
2015 2014 2013
ORV $3.71B $3.74B $3.26B
Motorcycles $0.7B $0.42B $0.26B
Global Adjacent $0.31B $0.32B $0.26B

The second factor of small revenue growth is again the issues of production capability at the Spirit Lake facility. Indian Motorcycles and the Slingshot three wheeler demand was stronger than expected and the facility could not meet demand. With the Slingshot model being moved to the Huntsville facility during the second half of 2016 it should open up space to produce more Indian Motorcycles.

Credit Risk

2015 2014 2013
Debt Ratio 0.58 0.58 .68
Interest Rate Coverage Ratio 63.36 64.55 96.83

While PII may not have the greatest cash position on its balance sheet it does have relatively low debt which in turn provides fantastic numbers for their interest rate coverage ratio.

Future Growth

2015 2014 2013
Capex to Depreciation Ratio 1.64 1.6 2.73
R&D Investment $166M $148M $139M
Acquisitions $41M $28M $137M
Share Buyback $294M $82M $530M

An area you cannot fault PII is that they are always putting money to work through Capital Expenditures, R&D, or Acquisitions. Though the last 3 years of acquisitions have been primarily in the Global Adjacent Markets which as stated earlier is not a growth industry but one that will hopefully provide steady earnings to offset peaks and valleys of the consumer product sales.

An area of growth concern that cannot be seen in PIIs financials lies within their motorcycle segment and more specifically Indian Motorcycles. Indian products have seen phenomenal growth in the short time they have entered the market but their largest hindrance to growth outside of manufacturing is the network of dealers. PII has approximately 200 authorized dealers while in contrast Harley Davidson has approximately 1500 dealers. Furthermore, Indian dealers are not even located in all of the lower 48 states and many consumers have had to travel across state lines just to make a purchase.

Overall I would love to see a reduction in their share buyback program and instead roll that money into a new dealer incentive plan to grow their dealer base and improve existing dealer facilities to provide a better buying experience for the consumer.

Shareholder Value

2015 2014 2013
P/E Ratio 13 23 27
Book Value per Share $14.68 $12.82 $7.71
Dividend Yield 2.40% 1.23% 1.11%

PII’s 5 year P/E average is 20.42 so its current share price is well below this with a current P/E of 13. Though I would discount the 5 year P/E average as there may have been a bad assumption that PII can continue to grow their ORV sales and investor expectations for Indian sales may have been overhyped. A more reasonable P/E range would be in a range of 12 to 16.

Conclusion

In the short term, PIIs primary catalyst for growth lies within their Motorcycle segment and ability to produce enough product to meet demand. In the long term, the Huntsville facility will eventually get to 100% capability and decent growth should return again in 2017.

Their 2015 overspending on inventory ate into profits indicating the 1 year 3.77% dividend growth rate will not be the norm once expanded production comes online. The dividend is well funded and if necessary they can dial back their investments to increase free cash flow.

Overall I rate PII a buy but based on your savings or income goals your target entry price may be different than mine. Personally I am a strong buyer if the stock price dips below $80/share and may initiate a small position if the price drops near $82/share. - Comments: 0

My Kids Want to Work But... - 22 May 2016 15:20

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I live in the Northeast and have been seeing odd employment trends locally and was really wondering if this is a trend nationally.

I have two teenage children who have been searching for a part-time job for more than a year but have yet to land a job. I find this amazing as a stretch of my town is commonly referred to as “Miracle Mile” due to its high density of retail businesses that generates significant income for the town. With such a concentration of businesses you would think getting a part-time minimum wage job would be snap.

As long as I could remember, part-time minimum wage jobs at grocery and retail stores have long been the bastion of employment for teenagers or retirees. Jobs were plentiful and turnover was high. So why is it taking so long for my kids to find part-time jobs? I get that a % of jobs no longer exist thanks in part to automation, online purchases, and companies just becoming more efficient but I find it hard to believe that not one offer has come their way.

After talking to my two teens they enlightened me to an interesting point, they said every time they go to an interview they are competing with other candidates in their late 20’s, 30’s and even 40’s. Over the last month every time I stepped into a retail business I started to notice that a large percentage of the employees are full blown adults. I have only seen a handful of teenagers or retirees in the ranks of minimum wage retail!

What the heck is going on when fully able adults have to resort to part-time minimum wage jobs to earn a living? Politicians and the Fed keep saying the economy is heating up and unemployment is relatively low. I’m just not seeing this. Maybe the problem I am seeing is local but if this is widespread then are we fooling ourselves things are getting better?

What I find really offensive is the political and media attack on retail and the push for an increase in minimum wage and making retailers out to be the spawn of Satan. I might be missing something but as I stated earlier retail has long been the bastion of part-time minimum wage teens and retirees. Back when I was a teen in the 80s the only adults that worked in retail were managers or specialty skills like butchers or bakers.

The change in this landscape of employment is truly amazing! I honestly believe politicians are playing a magicians game of misdirection. They are redirecting our attention at retail (where jobs were plentiful) as being evil for paying rock bottom minimum wages so we do not see their failure at creating an environment for good paying jobs (1 ½ times minimum wage or more) to compensate for the massive loss of manufacturing jobs during the 80s & 90s.

I do not know what this means in the big scheme of things or in relation to my portfolio but my gut is telling there is a snowball starting to roll down the hill and will be getting bigger with each passing year. - Comments: 0

Recent Buys (STAG, PEB) - 21 May 2016 23:04

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May has been a quiet month for me for both blogging and stock buys but that changed with some price reduction thanks to interest fears. Last week I grabbed 350 shares of Stag Industrial (STAG) at $20.60 and 100 shares of Pebblebrook Hotel Trust (PEB) at $24.

Both REITS have been knocking it out of the park with AFFO growth but for some odd reason their efforts have not been rewarded in share price so I was more than happy to grab these at deflated prices. STAG was down 3% from recent price of $21.40 and PEB was down 7.6% from its recent price of $26 per share.

Of course both of these holdings are REITS and this does make me overweight in the sector but this is only temporary. My HCP holding announced they will spin-off their problem child HCR ManorCare portfolio. While this is good for HCP corporate the last thing I want as a shareholder is to hold stock in the divested problem child so to avoid the issue (as well as tax complications) I plan on selling HCP in the near future which will bring my REIT weighting back to a 10% level. - Comments: 0


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