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Monday, May 24, 2010

Polaris Can't Keep up with Demand - And the Sky is Falling? It Simply Doesn't Add Up as People Want Their ATV!

We commented last week about market pundits emerging from the woodwork calling for DOW 5,000. We even saw someone calling for DOW 3,800 by December -- we've not had time to listen to this person's reasoning, but -- on it's surface -- "the call" is probably more a publicity stunt than anything (to sell books) and, for this reason, we don't share the link here (a quick Internet search should uncover, if you're interested).

Anything is possible, yet remember that share prices and market indices are driven by corporate earnings power and the earnings outlook remains much better than one year ago, even if muted. Thus, we strive to ignore the noise and focus on the signal. Our research focuses on bottom-up company specific fundamentals.

We're not entirely jumping up and down. We know things are still tough and creative destruction may well keep unemployment elevated until new jobs are created through plain old innovation. Yet, we look around and, for the most part, see signs that run counter to the double dip mentality. Recall that, in late March, we mentioned the cruise business and Carnival Cruise Lines (CCL) showing a recovery in pricing power and bookings.

Now today, an article in the WSJ, After Slashing Inventory, Polaris Now Struggles to Meet Demand highlights how consumer oriented companies that dramatically slashed inventories still plan to run lean but can't keep up with better-than-expected demand. In this case, the company is Palaris (PII), which makes recreational vehicles such as ATVs and snow mobiles. From the article:
  • Polaris cut its U.S. and Canadian dealer inventories by nearly a quarter last year and expects an additional 15% drop this year, taking them to their lowest level since 1997. But sales so far this year "are better than we expected for all products," says Polaris President Bennett Morgan.
  • To cope, the company has recruited almost 200 more people for its production work force—an increase of roughly 10%—and will likely boost employment significantly again during the second half, Mr. Morgan says. The company is also pushing dealers to switch from an old program of taking big deliveries twice a year to ordering less product more frequently, which would theoretically match customer demand.
The company raised guidance in its March quarter earnings report and, like so many other companies, Polaris' share price saw a tremendous recovery over the past year. Two-year chart from Yahoo! Finance (YHOO):

Despite the run, shares trade at 14 times consensus 2011E earnings and offer a 2.8% yield.

Our capital is focused elsewhere, yet we share the Polaris story as another example that things appear to be significantly better than some indicate. Apparently, some people are taking cruises and buying ATVs.

Now, please tell us about DOW 5,000 again?

Happy investing,

Jeffrey Walkenhorst

Disclosure: long YHOO.
© 2010 Jeffrey Walkenhorst
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