With this stock you can get paid to wait for the financial turnaround.
2024 was a great year for the stock market. The S&P 500 The index rose 23% for the year, driven by continued outperformance of large-cap growth stocks. But not every company took part in the ongoing market rally. Value stocks in particular underperformed the rest of the market, with some prices falling to incredible bargains.
One company in particular was faced with a challenging environment for its industry, which led to sharp declines in sales and profits in 2024. As a result, investors sent its shares down 39%. But the company is poised for a turnaround in 2025 and beyond and will pay investors a nice 4.8% dividend yield while they await financial results.
Here’s why Polaris (PII -2.33%) is too cheap to ignore.
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A market leader in a cyclical industry
Polaris develops and manufactures powersports vehicles. They are divided into three segments: off-road (all-terrain vehicles, side-by-sides and snowmobiles), on-road (motorcycles and light transport vehicles) and marine (pontoons and deck boats).
Currently, Polaris is the No. 1 or No. 2 manufacturer by market share in every category in which it operates. Over its 70-year history, the company has developed a network of dealers to sell its products and accessories. This scale gives the company the opportunity to invest more in research and development to build more powerful, safer, more capable and more attractive vehicles, helping to maintain its position.
In recent years, the industry has experienced enormous fluctuations in sales due to cyclicality. In 2020 and 2021, sales exploded across the industry as people looked for outdoor activities like ATV riding and boating. Polaris saw a 24% increase in sales over the last 12 months from mid-2020 to mid-2021. From there, sales increased even further, peaking in mid-2023.
But the last 18 months have been tough for Polaris. Third-quarter revenue fell 23% year-over-year, falling short of analysts’ expectations. High inflation in staple goods reduced consumer discretionary spending. There is no room in the budget to go ATVing or rent a pontoon boat. Meanwhile, high interest rates make financing a Polaris vehicle more expensive.
Declining sales weighed on operating margins as overhead costs remain high. Operating profit fell 60% in the first nine months of the year. However, management has taken steps to divest underperforming businesses to maintain sufficient liquidity and right-size operations. The focus on reducing costs and inventory held by dealers poses significant problems in the short term, but should put the company on track to achieve better margins in the future.
What is important is that the economic cycle is about to turn. According to Deloitte surveys, people are increasingly willing to spend more on discretionary purchases. With inflation under control and the Federal Reserve looking to cut interest rates, Polaris should see a nice recovery in the near term. Just as a decline in sales had a significant impact on earnings, an improvement in sales should lead to a similarly strong recovery in earnings.
Too cheap to ignore
Aside from a brief period during the coronavirus crash in 2020, investors haven’t had the opportunity to buy Polaris shares at this price since 2011. But Polaris is a much larger company than it was in 2011. It is also still well positioned to grow thanks to its market-leading positions and management’s prudent capital allocation, allowing us to grow sales and earnings over the long term. While the company may not be growing as quickly as it did in the 2010s, it’s undoubtedly a bargain at today’s price.
Management has increased its dividend for 29 consecutive years. Although the company has faced challenges in recent years, it decided to increase the dividend by a penny per quarter as its commitment to the dividend remains a top priority.
The continued dividend distribution should not be a problem for Polaris. It generated almost enough free cash flow to cover payments in the dismal 2024, while leaving plenty of additional cash on the balance sheet. If free cash flow recovers, the company should be able to bolster coffers, increase the dividend again in 2025, and utilize the remaining $1.1 billion from share repurchase authority.
Because the stock is trading at such a low price, the dividend yield has risen to 4.8%. This is a great opportunity to get paid to wait for the stock price to recover. And with shares trading at a price below 15 times analysts’ consensus 2025 earnings forecast, there’s a strong chance the stock price will rise from here as business improves and investors buy into it in the future grant a better win multiplier.
Adam Levy has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
