Powersports juggernaut Polaris (PII 0.17%) has recorded total returns of nearly 30,000% since its initial public offering (IPO) in 1987. To put this incredible rise in perspective, a $3,400 investment at the company's IPO would have made you a millionaire using today's share price and accumulated dividends.
PII Total Return Level data by YCharts
What makes this even more fascinating is that it remains valid even after Polaris trades 40% below its 52-week highs after reporting a 4% decline in sales in its most recent quarter.
In fact, following this share price drop in 2023, Polaris shares are down 36% from where they were exactly 10 years ago -- even while revenue has risen 140% over that same time.
So is the market's new cautious stance toward Polaris stock warranted, or is this niche market leader trading at a once-in-a-decade valuation? Here's why I think the latter seems to be the case.
The market leader in U.S. powersports vehicles
Polaris has 19 global manufacturing facilities and maintains a No. 1 market share across the U.S. powersports vehicle industry. This wide-ranging niche of the vehicle market includes all-terrain vehicles (ATVs), motorcycles, snowmobiles, and personal watercraft. With a presence in each of these subcategories, Polaris operates through three business segments:
- Off-road vehicles (75% of sales): ATVs (single-seat four-wheelers), side-by-sides (caged utility vehicles with two or four seats), and snowmobiles.
- On-road vehicles (14%): Motorcycles (Indian brand), roadsters (Slingshot brand), light hauling, and passenger vehicles.
- Marine (11%): Pontoons and deck boats sold through the Bennington, Godfrey, and Hurricane brands.
Currently, Polaris holds a No. 1 market share in North American markets across ATVs and side-by-sides, as well as a top spot in pontoon boats when combining its Bennington and Godfrey marine brands. Meanwhile, it keeps a No. 2 spot among snowmobiles and 900cc motorcycles. This creates a well-diversified portfolio of powersports vehicles, making Polaris the dominant player in its niche.
Better yet for investors, these market shares continued to grow stronger in the company's recent third-quarter earnings -- despite a 4% sales decline. This signals that despite the challenging operating environment caused by higher interest rates and lower consumer confidence, the Polaris name and its numerous brands remain top of mind among customers.
The company may see this outperformance over its peers because of its burgeoning Polaris Adventures operations. Polaris Adventures lets customers rent the company's vehicles at over 200 outfitters across North America and explore the surrounding scenery. This is a brilliant way to bring prospective Polaris enthusiasts into the fold and has been proven to double the odds of a customer buying from the company in the future. The business segment has grown by 60% annually over the last five years.
Top-tier profitability and returns of cash to shareholders
Perhaps most importantly for investors, Polaris offers market-beating profitability alongside its market leadership. Recording an average return on invested capital (ROIC) of 28% since the turn of the millennium, the company has proven excellent at using its debt and equity to create outsize profits.
PII Return on Invested Capital data by YCharts
While its ROIC dipped in 2016 due to recalls, supply chain issues, and a lack of focus on its core powersports operations, Polaris has seen its profitability metric rise back to 18% recently. To put this figure in perspective, the median ROIC among S&P 500 stocks is just 9%, highlighting the company's more robust relative profitability.
Armed with this profitability -- and free cash flows that have roughly equaled net income historically -- Polaris has handsomely rewarded its shareholders over time. After raising its dividend for 27 consecutive years, Polaris now pays a 3% dividend with a measly payout ratio of only 25%. This highlights the immense dividend growth potential remaining ahead of the company, as it could theoretically triple its payments and still have excess profits.
While dividend growth has temporarily slowed over the last few years, management hasn't slowed its cash returns to shareholders. It has bought back more than $1 billion of its shares in the previous three years, lowering the company's share count by 9%. And management looks to continue this torrid repurchase rate. It authorized a new $1 billion buyback in October 2023, aiming to reduce its share count by another 10% before 2026.
These buybacks couldn't come at a better time.
A once-in-a-decade valuation
Trading with an earnings yield of 12% and a free-cash-flow (FCF) yield of 7%, Polaris is sitting at what may be a once-in-a-decade valuation.
PII Free Cash Flow Yield data by YCharts
Due to working capital fluctuations, it is probably best to value Polaris at the midpoint of these two valuations -- let's say 9% to be conservative. This cheap valuation -- compared to the S&P 500's average earnings yield of 4% -- means that management is poised to get some serious bang for its buck with the buybacks.
Ultimately, the market currently has Polaris priced as a no-growth stock rather than the market-leading, high-ROIC business it is, leaving me to think this is a magnificent dividend stock to pick up at a deep discount.
