In a research note titled “Upgrading Polaris; Buying the Farm,” BMO Capital Markets analyst Gerrick Johnson reports that BMO is upgrading shares of Polaris to Outperform from Market Perform “with a revised target of $136.”
Johnson writes that strong “recreation retail demand is well known. We think the best case for acquiring PII shares is that sales of its off-road products for utility purposes, primarily to farmers, are under-appreciated. We believe the agricultural market is in the early stages of a multi-year cycle. Meanwhile, we think a Biden presidency means we see a stronger likelihood that onerous tariffs could be lifted, offering about +10% potential upside to current EPS estimates.
“Sales of PII’s outdoor recreational products are seeing a significant benefit from the COVID-19 pandemic as people look for a way the recreate outdoors with their family in a socially distant manner. However, this story is well known and factored into PII’s share price.
“We think investors have been overly focused on PII’s recreational markets, ignoring strength in utility and the farm economy. Strong utility demand is central to our upgrade. We think corn prices at around $5 per bushel will encourage fleet upgrades. Furthermore, booming farmer incomes in 2021 and beyond should allow for the purchase of a recreational ORV or snowmobile to play with over the winter months.
“We believe 4Q will represent a market share inflection point for PII, which has struggled to gain share in the past eight quarters. We think 4Q share gains have been occurring primarily because of how it has been able to flow product to dealers more efficiently. PII’s retail flow management system (RFM) has proven to be a strong competitive advantage, allowing PII dealers to manage inventory flow better than other brands and thereby take market share.
“PII is currently without a permanent CEO after former CEO Scott Wine departed at the end of the year to take the CEO role at CNH Industrial (Case-New Holland). We think the hiring of a new CEO could be a catalyst, as she/he has a chance to clean up the business and sharpen its focus. We would like to see it sell off noncore businesses like Aixam Mega French micro-cars or Taylor-Dunn industrial vehicles, focus on its core powersports businesses, and allocate proceeds to either debt paydown or share buybacks.”
— Dave McMahon, editor, dmcmahon at powersportsbusiness.com