First Cut Stock Study Report

Transcription

1 First Cut Stock Study Report Company Name: Polaris industries Ticker: PII Date of Study: 6/01/2015 Price: $ Your Name: Ann Cuneaz address: annc@betterinvesting.org City: Madison Heights State: MI Chapter Name (if applicable): BetterInvesting Staff Note: Polaris was one of the stocks included as part of an Industry Study, presented on June 3, 2015 in the StockUp program. Members may view a recording of this session at Discuss why you consider this to be a high quality, growth company that should be investigated further. Please include comments on historical sales and EPS growth, pre-tax profit margin, return on equity, and debt. Polaris.is a medium-size company and has demonstrated fairly consistent and steady growth over the past 10 years. Sales have grown at a rate of 11.4% over the past 10 years, which includes the sales decline during the Great Recession in EPS have grown faster than sales at 19.6% over the 10 year period. Pre-tax profit on sales has been increasing and was 15.6% in This was the highest level achieved in the past 10 years. % Earned on Equity is also increasing, with a 5-year average of 49%. Companies that can consistently achieve more than 20% ROE are considered excellent. Polaris has 20.8% debt to capital The debt level seems very manageable, with total interest coverage in excess of 25 (a value lower than 5-7 would be of concern). Briefly describe how the company makes money: (Source: K and PII Investor Presentation May 2015) Polaris designs, engineers and manufactures Off-Road Vehicles (ORV, 62% of sales), including All-TerrainVehicles (ATV) and side-by-side vehicles for recreational and utility use, Snowmobiles (7% of sales), Motorcycles (8% of sales) and Global Adjacent Market (small vehicles, commercial and military, 6% of sales), together with the related replacement Parts, Garments and Accessories (PG&A, 17% of sales). These products are sold through dealers and distributors principally located in the United States, Canada and Europe.

2 Polaris is a global company selling their products in more than 100 countries. 75% of the revenue is from the United States, 10% from Canada and 15% from International (primarily Europe). Projected growth rate for sales: 11% Why did you select this rate? Discuss from where future growth will come. The company's stated objective is to grow sales to more than $8B by 2020, which is a 12% CAGR. The Polaris growth strategy is to generate 5-8% from annual organic growth, and to add $2B in sales from acquisitions and new markets. The company also plans to increase the international market to 33% of revenue, up from 15% in Polaris sells very expensive "toys," and is, therefore, quite sensitive to the economy as seen in the company performance in Another recession will come again, and is likely to occur sometime during the next 5 years. The selected growth rate tries to anticipate a recessionary downturn followed by the subsequent recovery. Some of the company's strongest growth has come from the Motorcycles division, which includes Victory, Indian and Slingshot brands. The historic 3- year CAGR is 38%, with a 59% increase in Polaris has issued guidance of 55-70% growth in this division for International growth is currently being challenged by the strong dollar, and in the short term Polaris does not expect international sales to contribute to sales growth. Analyst Estimates: Morningstar: "We believe sales for the off-road segment can increase at a low-double-digit rate over the next five years, with motorcycles growing faster than off-road due to the Indian relaunch and new Slingshot offering, while snowmobiles increasing at a low-single-digit pace over the longer term." Value Line: 11.5% (3-5 years); $6.9B in ACE (Yahoo): 10.6% (2 year) ACE (Mstar): 10.9% (2 year) Inventories rose 35% in FY 2014, which is much higher than the 18.6% sales grew in This is a red flag and a metric to be monitored. Inventories continued to rise 17% in the 1st Q of 2015, although this was in line with the 16.3% sales increase. Management has indicated that inventory will return to more normal levels by the end of the fiscal year.

3 The selected growth rate of 11% is supported by the historical performance, is in line with the company's own growth strategies and with the analyst estimates. Projected growth rate for earnings per share: 12% Why did you select this rate? One of the company's stated objectives is to increase the net profit margin to > 10%. The 2014 net profit margin was 10.1% (15.6% pre-tax profit margin), so maintaining this level would satisfy this objective. Analyst Estimates: Morningstar: "Polaris' gross profit margin is poised to expand moderately over the next decade. Our base case assumes that gross margins stabilize at 31% (was 29.5% in 2014)." Value Line: 13.5% (3-5 years); $11.75 in ACE (Yahoo - 2 analysts; and Zacks): 17.5% (5 year) ACE this year, next year: 11.9%, 16.8% (Yahoo) ACE (Mstar): 13.5% (5 year) If pre-tax profit margin holds at 15.6% and the company reduces the number of shares to 66 M, the preferred procedure calculation results in future EPS of $11.96 or a 12.1% CAGR. 12% is a reasonable projection for future EPS growth and is supported by historical growth, the company quidance and the analysts' expectation. The preferred procedure calculation also supports this projection assuming the company is successful in holding profit margins at the current high level or improving them slightly. Competitive pressures may challenge this assumption. Projected High P/E: 22 Why did you select this value? The historic high P/E for Polaris has been trending upward for the past 5 years, but high P/Es in 2008 and 2009 were only 16. Value Line is projecting the average P/E to contract to 17 from the 21 in I agree and feel the average high P/E of 22 is a reasonable projection and is down from the recent high P/Es of 27 and 24 in 2013 and Projected Low P/E: 14 Why did you select this value? We see the same upward trend in the historic low P/E values, and one might be tempted to remove the 2010 and 2011 values from the average. I note that the low P/E values in 2008 and 2009 were bottoming out at 5, so the 10 and 11 values from 2010 and 2011 should be considered as we make our

4 projection for the future low P/E. Using a projected low P/E of 13.2 results in a forecast low price of 89.2, a price that has not been seen since May of I took a little more aggressive stance and rounded the 5 year average up to 14 and used this for the projected low P/E. Projected Low Price: $94.6 Why did you select this value? After adjusting the low EPS value to reflect the most recent 4 quarters (TTM) EPS, the 4B(a) calculation (low P/E x low EPS) resulted in a reasonable low price. At the current price, the stock is a (check one): Buy or Hold or Sell At the current price, the upside-downside ratio is: 2.5 to 1 Compound Annual Return Using Forecast High P/E: 14.3% Your final recommendation (check one): Buy or Hold or Sell Explain: Polaris pays a dividend and the current yield is about 1.5%. One interesting note is that when Polaris was dealing with declining EPS in 2009, they raised the dividend in that year. To me that indicates a well-managed company that is committed to their shareholders. One caution noted in this report is the high level of inventory the company currently is holding. This situation should be monitored by reading the future quarterly reports (10-Qs) for Polaris. Polaris appears to be a high quality company in a cyclical industry. When the economy slows down, purchases of their highly discretionary and expensive products are some of the first to be put on hold by consumers. At the current price of $143 the stock appears to be overvalued. This is also reflected in the current P/E of 21.2 when compared to the average P/E of 17.7 (or a relative value of 120% for those who like to use that measure). Polaris is a good candidate for a watch list. Based on the prepared SSG, Polaris would be a buy around $136.

5 Resources used: Morningstar Analyst Report 4/23/2015 (premium service obtained through my public library) Value Line Report 5/8/2015 (premium service obtained through my public library) PII Investor Presentation May, v2.pdf PII 2014 Annual Report Annual-Report-Final2.pdf PII 10-Q April 30, x10xq.htm

6 Stock Selection Guide Company Polaris Industries I Date 5/29/2015 Prepared by BI Data taken from BI Stock Data Where traded NYS Industry Recreational Vehicles Capitalization --- Outstanding Amounts Reference Preferred ($M) 0.0 % Insiders % Institution Diluted Shares (M) Debt ($M) % to Tot Cap 27.6 % Pot Dil VISUAL ANALYSIS of Sales, Earnings, and Price Symbol: PII FY2015 QuarterEnding (03/15) Sales ($M) Earnings Per Share Latest Quarter Year Ago Quarter Percentage Change 1, % % (1) Historical Sales Growth 11.4% (3) Historical Earnings Per Share Growth 19.6% (2) Estimated Future Sales Growth 11.0% (4) Estimated Future Earnings Per Share Growth 12.0%

7 2 EVALUATING Management 5 5-YEAR POTENTIAL This combines price appreciation with dividend yield to get an estimate of total return. It provides a standard for comparing income and growth stocks. A Present Full Year's Dividend $ Present Price of Stock B AVERAGE YIELD - USING FORECAST HIGH P/E Avg. % Payout 31.8 % 1.4 % Forecast High PE C COMPOUND ANNUAL RETURN - USING FORECAST HIGH P/E Annualized Appreciation Average Yield Annualized Rate of Return 12.9 % 1.4 % 14.3 % % Present Yield AVERAGE YIELD - USING FORECAST AVERAGE P/E Avg. % Payout 31.8 % 1.8 % Forecast Average PE COMPOUND ANNUAL RETURN - USING FORECAST AVG P/E Annualized Appreciation Average Yield Annualized Rate of Return 8.4 % 1.8 % 10.2 % Polaris Industries I Last 5 Year Avg. Pre-tax Profit on Sales 11.2% 9.9% 9.6% 9.1% 9.7% 11.0% 13.0% 14.9% 15.2% 15.6% 14.0% % Earned on Equity 36.4% 57.6% 61.3% 82.7% 48.7% 39.5% 43.8% 43.7% 66.2% 51.2% 48.9% % Debt To Capital 4.6% 59.9% 53.6% 59.3% 49.4% 35.0% 17.7% 13.4% 34.9% 20.8% 24.4% 3 PRICE-EARNINGS HISTORY as an indicator of the future This shows how stock prices have fluctuated with earnings and dividends. It is building block for translating earnings into future stock prices. PRESENT PRICE HIGH THIS YEAR LOW THIS YEAR A B C D E F G H Year Price Earnings Price Earnings Ratio Dividend % Payout % High Yield High Low Per Share High A / C Low B / C Per Share F / C * 100 F / B * AVERAGE CURRENT/TTM AVERAGE PRICE EARNINGS RATIO 17.7 CURRENT PRICE EARNINGS RATIO 21.2 EVALUATING RISK and REWARD over the next 5 years Assuming one recession and one business boom every 5 years, calculations are made of how high and how low the stock might sell. The upside-downside ratio is the key to evaluating risk and reward. A HIGH PRICE - NEXT 5 YEARS Avg. High P/E X Estimate High Earnings/Share Forecasted High Price $ B LOW PRICE - NEXT 5 YEARS (a) Avg. Low P/E (b) Avg. Low Price of Last 5 Years (c) Recent Market Low Price (d) Price Dividend Will Support X Estimate Low Earnings/Share 6.76 Forecasted Low Price $ Present Dividend High Yield Selected Forecasted Low Price $ 94.6 C ZONING using 25%-50%-25% Forecasted High Price Minus Forecasted Low Price Range. 25% of Range 41.9 Buy Zone Hold Zone Sell Zone % 94.6 to to to Present Market Price of is in the Hold Zone D UPSIDE DOWNSIDE RATIO (POTENTIAL GAIN VS. RISK OR LOSS) High Price Minus Present Price Present Price Minus Low Price To 1 E PRICE TARGET (Note: This shows the potential market price appreciation over the next five years in simple interest terms.) High Price Present Market Price X % Appreciation 132.5