Wedbush Downgrades Polaris, Concerned About 'Lackluster' ORV Business

• Shares of Polaris Industries Inc. PII have declined 30.25 percent year-to-date, touching a low of $105.49 on Monday.
• Wedbush’s James Hardiman has downgraded the rating on the company from Outperform to Neutral, while lowering the price target from $156 to $117.
• Hardiman expressed concern regarding the “lackluster” ORV business and limited upside to the 2016 margins.

Analyst James Hardiman explained that while he continued to be “impressed with the long-term potential of PII's motorcycle business, the anemic growth now apparent in the ORV business is more than offsetting motorcycle upside in the near term.”

Hardiman expects ORV retail sales in North America to remain in the low single digits going forward, with Wedbush’s Polaris contacts indicating that sales increased 3 percent during October, lower than the 3Q15 levels.

In addition, according to the Wedbush report, “Based on the sizeable outperformance of the motorcycle business relative to the ORV business we estimate that segment level mix will represent a 50 bp gross margin headwind in 2016.”

Headwinds are also expected due to FX, which is likely to be offset by fixed cost leverage benefit, as well as lower spirit lake and raw material costs. Hardiman also believes that “gross margin growing pains associated with the evolution of PII’s mix are likely to limit margin power in 2016.”

The 2016 EPS estimate has been lowered from $8.69 to $8.33, while the 2016 gross margin expansion estimate has been lowered from 80 bps to 40 bps.