Is Polaris Industries being bought after discontinuing this unprofitable business?

Polaris Industries (PII 0.57%) hasn’t fared as badly as some in this era of rampant inflation and skyrocketing gas prices, with its shares down just 3% year-to-date compared to a 20% drop in S&P 500.

One drag on its performance over the past few years, however, has been its loss-making business in the retail of SUV and truck parts. But with the decision to sell Transamerican Auto Parts to private equity-backed Wheel Pros, the company will focus more closely on its core motorsports operations. Does this make Polaris stock a buy?

Image Source: Polaris Industries.

Knocking out

Transamerican Auto Parts (TAP) was Polaris Industries’ first foray into retail, and while it was somewhat of an odd decision at the time, it had a connection to its extreme sports business because the company sold parts and accessories for ATVs and trucks.

In the nearly six years since the acquisition, however, Polaris shares have gained just 32%, while the broad market index has risen nearly 80%. Although lagging behind for reasons other than the TAP acquisition, the retail business did nothing to improve its performance.

TAP accounts for the vast majority of Polaris’ aftermarket revenue, about 82% at the end of last year. But growth has always been marginal or in decline, and profitability has been dubious at best. Most of the sales and earnings gains Polaris posted in the segment came from its other aftermarket businesses, brands that make parts, accessories and apparel for off-road vehicles, snowmobiles and motorcycles.

In the first quarter, sales of power sports aftermarket parts jumped 16%, while TAP sales fell 9% to $178 million, reducing the segment’s gross profits by 11% from last year.

It became obvious to management that TAP had to go, but while Polaris bought TAP for $665 million and generated $760 million in revenue in 2021, it sold it for a measly $50 million.

Losing extra pounds

The sale of the aftermarket retail business is not the first ancillary operation that Polaris has divested. It shed Larson Boats’ 100-year-old fishing boat business soon after buying it in 2019 and offloaded much of its utility vehicle business by spinning off its Global Electric Motorcars and Taylor-Dunn units (another 2016 purchase d.) to Polaris executives who run them as a separate stand-alone company.

Polaris has retained its pontoon and party boat operations, as well as its international Aixam and Goupil utility vehicle businesses, and intends to focus on its remaining motorsport vehicles.

Just ahead of the multi-purpose vehicle spinoff, Polaris announced a new electric-powered sport UTV born out of an exclusive partnership with Zero Motorcycles, one of the nation’s leading electric motorcycle companies. The Ranger XP Kinetic features the Zero’s muscular 110-horsepower (82-kilowatt) engine, which delivers 140 foot-pounds of torque, which Polaris claims makes it the most powerful side-by-side utility on the market.

Ready to power up

This is where Polaris Industries should have been all along, focusing on its high-powered sports cars, where it is the biggest player in the industry.

It admits it lost market share in nearly every category in the first quarter, but that was mostly due to supply chain disruptions. CEO Mike Speetzen says Polaris will increase market share in the coming quarters, but right now it depends on which manufacturer gets its cars to customers first.

This puts Polaris in a good position. As a leading manufacturer of motorsport vehicles, once the bottlenecks in the supply chain begin to open up – and there are indications that things may begin to ease – its manufacturing power and dealer network should allow it to dominate the market for off-road vehicles, snowmobiles, motorcycles and the growing segment of electric vehicles.

Industry leader in discount

At 15x trailing earnings, 10x next year’s guidance, less than 1x sales, and with Wall Street expecting Polaris to grow earnings at a 15% compounded annual rate over the next five years, the stock looks poised to take off.

Polaris Industries also relatively recently achieved the equivalent status of a Dividend Aristocrat, or S&P 500 stock that has increased its payout for 25 or more years. It hit that landmark two years ago, and its generous dividend of $2.56 per share currently yields 2.5% annually, which helps make this stock a buy. This is what I actually intend to buy in the next week.

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