Follow the North Star With Polaris

Polaris Inc. (PII) designs and manufactures snowmobiles, all-terrain vehicles, motorcycles, and boats mainly for sales in the USA, Canada, Europe, and Central America. Results over the past decade were excellent as detailed below. The growth was remarkable as it included a period of notable and costly product recalls as well as the covid pandemic years. Management did a fine job navigating those hurdles while raising dividends and retiring about 16% of all shares outstanding. Surprisingly, price-to-earnings ratio compression has taken away most of the shareholder returns from those who never sold when the stock was highly valued. That is too bad for them but offers a great opportunity for investors establishing positions today. When value created fails to reflect in stock prices, the remedy is almost always seeing a catch-up move higher to arbitrage away the discrepancy. What is Polaris worth? Over the prior 11 years, the stock's multiple averaged about 17.1 times earnings, accompanied by around 2.15% in yield. As of Jan. 22, 2023, those metrics stood at 9.8 times Value Line's earnings per share estimate for 2023 along with an above average yield of 2.46%. It is not as if traders have not appreciated Polaris in the past. In late 2014, they paid 24 times earnings to own it. Near year-end 2017, Polaris fetched almost 28 times earnings. Every one of Polaris' previous best entry points (green-starred below) reflected temporary periods when the shares were undervalued and ready to rebound. The current P/E is among the lowest ever for Polaris. Simply reverting to a more typical valuation could justify a move to $164 by this time next year. That implies 12-month total return potential of about 60%. Yahoo Finance enigmatically labels Polaris as undervalued yet calls for a year-ahead price of just $112.64. That goal price seems odd and out of bounds compared with all other sources. More on that will follow. Note that the stock peaked at $127.37 about 11 months ago and fundamentals have improved since then. GuruFocus research calls Polaris as being worth $129.35 right now. Morningstar (MORN) rates Polaris as a 5-star, best buy. They call the stock's value as $175. Reaching that goal would deliver a solid 68.4% plus dividends. Wide moat stocks like Polaris offer protection against encroachment to market share. Knowing management earns an exemplary rating for capital allocation is another plus factor. Fast Graphs is in full agreement regarding Polaris. They document how much higher the shares have traded year after year in the past while also confirming the much improved profits since those highs were set. Fast Graphs sees a normalized P/E for PII as 16.55 times. Simply returning to that valuation on their outlook for 2023 EPS suggests a better than 65% total return lies ahead. Everybody slicing and dicing the numbers on Polaris thinks the shares are destined to go higher. That makes it a good candidate for put-writing to generate supplemental income with only a modicum of risk. Actual option pricing, with Polaris at $103.89, is shown below for the one-year, Jan. 19, 2024, expiration date $110, $115 and $120 strike price puts. Worst-case, forced purchase prices dropped to either $93.80, $96.00 or $97.90 per share depending on the strike(s) employed. Future stock market action can never be guaranteed. We can know for sure, though, that owning Polaris at any of the break-even points shown would have been a winning position more than 95% of the time dating back to before the start of 2021. Polaris shares spent most of those 25 months hovering between $100 and $120 even as EPS grew from $7.71 to an expected $10.25 for 2022 when Q4 numbers are released next month. Owning shares outright offers excellent upside and decent dividend income with no preset time horizon. Shorting naked puts captures immediate premium dollars up front with a strong possibility of never being forced to buy the underlying shares at all. Buy Polaris shares, short some LEAP puts or consider doing both.

Follow the North Star With Polaris

Polaris' growth was remarkable as it included a period of notable and costly product recalls as well as the covid pandemic years.

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