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Bear of the Day: Polaris Industries (PII)

David Borun

Today’s Bear of the Day is an example of how even apparently well-positioned US companies have suffered from the impact of the trade wars.

In the summer of 2018, Polaris Industries (PII) looked to be a winner in the tit-for-tat tariff battle between the US and international trading partners including Canada, Mexico, the EU and China. Polaris enjoyed a lower reliance than most of its competitors on imports for the source of raw materials as well as on exports for sales of finished goods.

When President Trump singled out US motorcycle manufacturer Harley Davidson (HOG) for the decision to shift some manufacturing overseas to avoid tariffs, Polaris and its Indian brand of American made cruiser cycles looked poised to benefit from the resulting Harley boycotts.

Record low unemployment and rising average hourly wages also promised to support sales of Polaris’ entire line of motorcycles, ATVs, snowmobiles and watercraft.

Unfortunately, the increase in sales never materialized and Polaris instead saw a sales slump in the second half of 2018.

Motorcycle sales were especially disappointing. Harley Davidson did in fact lose significant revenues and ceded market share to Indian, but a decline in the industry as a whole still took a bite out of sales. Big motorcycles look to be falling out of favor with consumers as baby-boomers age out of riding – flooding the market with lightly used bikes – and younger riders shift towards smaller lighter cycles, leaving cruiser manufacturers licking their wounds.

An ill-advised investment in a three-wheeled motorcycle called the Slingshot has likewise been a big disappointment for Polaris.

In fact, sales of all kinds of powersports equipment have been below expectations of just a year ago. Though it’s difficult to hang the blame on a single factor, the continuing trade war with China is definitely playing a part. This is one of the vicious realities of trade disputes – even the companies who appear at first to be largely immune from the direct impact of tariffs and restrictive trade practices end up suffering eventually in indirect ways.

In the case of Polaris, the general slowdown caused by the trade war and the prospect of a global recession have had a chilling effect on customer’s willingness to make large purchases, especially for leisure activities.

Though Polaris hasn’t missed an earnings estimate in three tears, those estimates have been sliding lately as analysts revise downward, earning Polaris a Zacks rank #5 (Strong Sell).

Polaris remains a strong US manufacturer and is far from out of the game. In fact, several recent acquisitions, especially in the watersports business could well prove to be excellent buys. It’s certainly the kind of company that US investors want to root for.

We’ll have to wait a while to see the results however, and time is not a luxury we can afford. In the near term, Polaris is facing too many headwinds to make much sense in a balanced portfolio.

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