Riding Those Bikes to Big Gains

 | Aug 27, 2013 | 9:00 AM EDT
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Jim Cramer wrote Monday that the 52-week high list never lies. Two names that I highlighted last year are within a point or two of their 52-week high.

Last October, I liked Polaris Industries (PII) and Harley Davidson (HOG). I thought investors would ride away with big gains. And they have. Since my article, Harley Davidson is up 44% and Polaris is up 29%. Like I said in my article, I don't know why motorcycles and off road vehicles are selling, but they are.

Take Polaris. First half sales were up 11% and net income was up 20% vs. last year. Cash flow for the first half jumped 32%. All records for the first half.

One of the main drivers of the company's results has been a sharp increase in quality and lower rates of manufacturing rework. Costly manufacturing rework -- that is fixing parts that were not built properly the first time -- is down 35% since 2010. Materials costs, labor and overhead growth has slowed as the company has brought down rework. 

Net income bottomed out at 6% of sales in fiscal 2008. Since then, improved sales and an increased focus on costs have pushed net income to 10% of sales. Management believes sales can increase 13% to 15% and net income can increase 18-20% this year.

Increased sales of off-road vehicles are up 8-10% over last year's 22% rise. Motorcycles are seeing strong sales. Motorcycles sales are expected to jump 15 to 20%. The only business that remains frozen is snowmobiles. Last year, the snowmobile business was up just 1% to $283 million.

Last quarter, revenues were up 11.8% to $844.8 million. Gross margin increased 120 basis points due to higher selling prices and lower production costs. North American sales rose 11%.

"Motorheads" are eagerly awaiting deliveries of Indian Motorcycles in the second half of the year. Polaris bought the once-proud Indian Motorcycle Company in 2011 and has spent the time retooling the brand. The company launched the new Indian Chief on August 3 at the Sturgis, S.D.,  Motorcycle Rally and promises a price of $19,000 for a fully loaded 2014 Indian Chief. The company made a splashy video of the re-launch party.

Because of a slew of new products in the off-road category, continued manufacturing improvements and cost reductions, I think Polaris can continue to ride higher. With the re-energized Indian brand, I think the company can begin to take market share from other motorcycle makers which would drive sales higher than forecast.

Even with another weak snowmobile season, I think Polaris can reach $130 to $135 per share as investors turn the page on the calendar and start valuing the stock off conservative 2014 estimates of $6.23 a share on $4.19 billion in revenue. If I'm right, investors will continue to drive away with more profits.



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