Polaris Earnings: Higher Expenses Sink Near-Term Upside, but Market Share Gains Display Brand Power

Notable concerns in wide-moat Polaris’ third quarter print that displayed higher costs and a hesitant consumer sent shares down a single-digit clip. The firm saw higher manufacturing costs, increasing floorplan financing expenses, rising promotions, and mix eating into the enterprise level gross margin, which fell 130 basis points to 22.6%. The lack of volume leverage, with total sales falling 4%, but lower by 19% in on-road and 48% in marine, crushed operating income, down nearly 20% despite a 70% jump in financial services income. We plan to lower our $171 fair value estimate by a mid-single-digit clip due to two main changes. First, we are reducing our gross margin forecast for 2023-24 (60 basis points in 2023, 20 in 2024) given the longer duration to convert sales at dealers, which will keep both floorplan financing costs and promotions higher. Second, we will lower our 2024 sales growth (to flat from 3%) as we don’t expect the macroeconomic environment to turn positive over the next few months. That said, we view shares as attractive thanks to a wide margin of safety.