2024 was a great year for the stock market. The S&P 500 index climbed 23% for the year, driven by continued outperformance from large-cap growth stocks. But not every company participated in the ongoing market rally. Value stocks, in particular, lagged the rest of the market, and some have seen their prices drop to incredible bargains.
One company, in particular, has faced a challenging environment for its industry, leading to big revenue and profit declines in 2024. As a result, investors sent its shares down 39%. But the company's poised for a turnaround in 2025 and beyond, and it'll pay investors a nice 4.8% dividend yield while they wait for the financial results.
Here's why Polaris (PII -0.81%) is too cheap to ignore.
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A market leader in a cyclical industry
Polaris designs and manufactures powersports vehicles. It categorizes them into three segments: off-road (all-terrain vehicles, side-by-sides, and snowmobiles), on-road (motorcycles and light-duty hauling), and marine (pontoons and deck boats).
As it stands, Polaris is the No. 1 or No. 2 manufacturer in each category it operates by market share. Over its 70-year history, the company built a network of dealers to sell its products and accessories. That scale gives it the opportunity to invest more into research and development to build more powerful, safer, better-performing, and more attractive vehicles, helping ensure that it maintains its position.
Over the last few years, the industry has seen tremendous swings in sales due to cyclicality. During 2020 and 2021, sales exploded across the industry as people sought outdoor activities like ATV riding and boating. Polaris saw its trailing 12-month sales climb 24% from mid-2020 through mid-2021. Sales climbed even higher from there, peaking in mid-2023.
But the last 18 months have been tough for Polaris. Sales declined 23% year over year in the third quarter, lower than analysts were expecting. High inflation in core necessities reduced discretionary spending among consumers. There's no room in the budget to go out ATVing or to rent a pontoon boat. Meanwhile, high interest rates make it more expensive to finance one of Polaris' vehicles.
Slowing sales weighed on operating margin as overhead costs remain high. Operating income was down 60% through the first nine months of the year. But management has taken steps to divest underperforming businesses to maintain ample cash and right-size operations. Its focus on reducing costs and the amount of inventory held by dealers comes with some significant short-term pain, but it should put the company on a path to produce better margins going forward.
Importantly, the economic cycle looks poised to turn the corner. People are increasingly intent on spending more on discretionary purchases, according to surveys from Deloitte. With inflation coming under control and the Federal Reserve looking to lower interest rates, Polaris should see a nice recovery in the near future. Just as a sales decline weighed heavily on earnings, an improvement in sales should produce a similarly strong recovery in earnings.
Too cheap to ignore
Outside a brief period during the coronavirus crash of 2020, investors haven't had an opportunity to buy shares of Polaris at this price since 2011. But Polaris is a much bigger business than it was in 2011. It's also still well-positioned to grow revenue and earnings over the long run, thanks to its market-leading positions and management's prudent capital allocation. While the company might not be growing as fast as it did during the 2010s, it's undoubtedly a bargain at today's price.
Management has raised its dividend for 29 consecutive years. Even as the company has faced challenges in recent years, it opted to raise the dividend by a penny per quarter, as its commitment to the dividend remains a top priority.
Continuing to pay the dividend shouldn't be a problem for Polaris. It generated nearly enough free cash flow to cover the payments in dismal 2024, while maintaining plenty of additional cash on the balance sheet. As free cash flow recovers, it should be able to add to the coffers, increase the dividend again in 2025, and take advantage of the $1.1 billion remaining in its share repurchase authorization.
With the stock trading at such a low price, the dividend yield has climbed to 4.8%. That's a great opportunity to get paid to wait for the stock price to recover. And with shares trading at a price less than 15 times analysts' consensus earnings forecast for 2025, there's a great chance that the stock price will move higher from here as operations improve and investors give it a better earnings multiple in the future.
