Polaris Still Shines as the North Star

Polaris designs, engineers and manufactures all-terrain vehicles, snowmobiles, motorcycles and boats. These items and their accessories are distributed and sold through dealers in the U.S., Canada and Europe. Global adjacent markets in other areas, accounting for about 6% of sales, are served via local retailers. Despite supply chain disruptions during 2021, full-year results finished with all-time record sales and earnings for Polaris. PII's dividend was just raised to 64 cents quarterly, keeping the stock on the Dividend Aristocrat list for consecutive increases for yet another year. Also, 2021 adjusted earnings per share of $9.13 exceeded analysts' estimates, as did forward guidance of from $10.10 to $10.40 for 2022. Over the last nine years, sales almost tripled, cash flow rose by 141% and earnings per share advanced by 107.5%. Surprisingly, at its Monday closing quote of $108.23, PII was available for a below average multiple, while delivering an above typical current yield. Continuous shareholders made money since the end of 2012, but nowhere near as much as would have been expected. That's because right now you can own PII for $51.07 per share less (-32%) than it fetched at its November of 2014 peak of $159.30. Fundamentals are way better now than back in 2014 across all major metrics. That implies a substantial catch-up move higher is well overdue. Owning PII shares outright is the best way to get unlimited upside potential with no preset time horizon. What is Polaris really worth? The stock's long-term normalized price-to-earnings has run about 17.8-times, accompanied by around 2.13% in current yield. Assume just a conservative 17 multiple going forward and you come up with a 12-month target price north of $173. Not only is that reasonable, it is far from an upper limit. PII changed hands for nearly $160, at 24-times EPS of $6.65 during 2014. It topped out at almost $138 early in 2018 on EPS, which finished at $6.56. Now, with projected EPS of over $10, PII could easily make it to $180 or $200 before too long if investors warm up to its solid growth history and start valuing it more appropriately. Option writers can benefit from playing PII in two specific ways. Selling near-the-money puts out to Jan. 19, 2024, brings in generous premiums while also offering nice margins of safety versus the trade inception price. Actual bid-asks, plus last trading prices with PII at $108.23 are shown below. Here are the numbers on each of the put strike prices ranging from $100 - $115 along with the worst-case, forced purchase break-even prices. If you agree that PII is almost certainly heading higher, it is hard to imagine feeling scared to be forced to own it later, if exercised, at from $81.20 to $88.40. Even the most aggressive of the examples shown provided a break-even point that has not been seen since 2020. Maximum gains on these, or any other option sales, always equals keeping 100% of the premium dollars received up front. For the ones shown that equates to significant sums, from $1,880 to $2,660 per each 100-share commitment. Sophisticated option traders might wish to set up the following relatively conservative Jan. 19, 2024 expiration date $115 strike price buy/write combination. Cash flow details for a 100-share, one-call plus one-put combo is shown below. On expiration day there are just two basic ways things could play out. PII will either be $115 or higher, or below $115. If the former possibility plays out as expected the best-case scenario detailed next would apply. You'd have made at least 94.1% in under two years for an annualized return of better than 51%. That kind of gain can handily overcome even today's near 40-year high inflation rate. Better still, it morphs any gain of 6.3% or higher into that fabulous total return, if executed in a margin type account with excess free buying power. How cool is that? Outright buyers of PII, without any options attached, would need to see the stock rise to about $210 to capture that same cumulative 94% gain. What if PII fails to hold $115 on expiration day? If so, the worst-case scenario displayed below would unfold. Barring a major collapse, though, even that does not appear scary. You'd end up with a double-sized position in PII, but at an average cost of just $86.03 per share. Any decline of less than 20.5% would still allow for immediate liquidation for at least a small, and perhaps a hefty profit if Polaris wasn't far below the $115 strike price. As noted earlier PII hasn't been available for near $86 since the pandemic-tainted, very dark days of 2020. What more do you need to know? Buy some PII shares, sell some PII puts or consider setting up full buy/write combinations.

Polaris Still Shines as the North Star

Despite supply chain disruptions during 2021, full-year results for this Dividend Aristocrat finished with all-time record sales and earnings.

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