RBC Capital Downgrades Polaris, Says Transition Will Last Longer Than Previously Thought

In a report published Thursday, RBC Capital analyst Joseph Spak downgraded the rating on Polaris Industries, Inc. PII from Outperform to Sector Perform, while lowering the price target from $161 to $155. Given that the company appears to be transitioning into a period of low to mid double-digit EPS growth, the analyst believes that the recent peak multiple of the stock is unjustified.

According to the RBC Capital report, "2015 was billed as a transition year, and now that transition looks to last longer than we previously thought. Combined with a maturing and increasingly competitive SxS market, PII appears to be transitioning into a low-to-mid double digit EPS growth period and 2016 forecasts look high."

The company now expects to take a $20 million annual hit on Spirit Lake. Although this is expected to largely reverse in 2016, the analyst believes that there could still be a drag on margins, as compared to the previous expectations of the new paint system enhancing efficiency.

"It sounds like issues at Spirit Lake have also pushed out the ramp of new potential product," Spak stated.

Polaris Industries has guided to 2H15 retail close to the 1H15 levels, while stating that shipments would be equal. The analyst believes that this might lead to a decline in inventory growth by 4Q15.

Spak expressed concern, saying, "1) Competitors have new, more innovative product for the first time in a while. 2) SxS market appears to be maturing. 3) While not significant impact, on the margin higher rates may crimp demand… 4) Points 1-3 aren't positive for the rate of pricing gains witnessed to continue. 5) Oil/ag impact on Ranger in 2H."

Although the company does not appear to be giving up, the analyst believes that there is limited upside to the guidance.