Polaris Industries is likely to face headwinds in the near future, such as a dwindling motorcycle market and the continuation of tariffs, according to a report Morningstar Ratings provided to Powersports Finance.
Both Indian Motorcycles and Slingshot could face a difficult year with retail sales in the motorcycle segment forecast to grow 2% in 2019 and then decline 5% in 2020, Senior Equity Analyst Jaime Katz said in the report.
“With average shipments down 2% at Harley-Davidson over the last five years, we think there is ample evidence that demand for motorcycles continues to shift, Katz said. “And we don’t have any confidence that this trend has begun to abate, making the prognosis for 2019 motorcycle shipments less promising.”
Slingshot, which is a part of Polaris’ motorcycle segment, saw declines in the high-20% range year over year, the company said in its 3Q earnings report. While Polaris expects to see growth for Slingshot by mid-2019, “if Slingshot can’t find its footing in the next 18 months, we believe the [Polaris] board would have enough ammunition to shutter the brand, following in the footprint of Victory’s wind-down in 2017,” Katz said.
Polaris will also face challenges with steel and aluminum tariffs, which last year added 25% to the cost of imported steel and 10% to aluminum coming from the EU, Canada, and Mexico.
“While Polaris remained hopeful that it would be able to argue for an exemption from tariffs, given that it remains one of the only U.S. off-road vehicle and snowmobile manufacturers, we surmise such an exemption may take some time to execute,” Katz said. “Given other priorities of the administration and the general inertia surrounding such company-specific efforts, we expect the initial expectation that such discussion could be resolved by January could be delayed.”
This could place more pressure than anticipated on Polaris’ operating margins, which Morningstar models at 9.6% in 2019. However, Morningstar believes the operating margin is still poised to expand to more than 13% over a 10-year outlook as Polaris finds other ways to mitigate costs, Katz added.
In the third quarter of 2018, Polaris saw an increase in off-road segments but a decrease in motorcycles. Originations grew to $21.3 million in the quarter, compared with $18.1 million in the year-prior period.