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Polaris Industries Facing Trade Headwinds for Q1 Earnings

Rich Duprey, The Motley Fool

Although Polaris Industries (NYSE: PII) managed to beat Wall Street forecasts in the fourth quarter after a big boating acquisition and as off-road vehicle sales continued to rebound, it warned 2019 was going to be difficult. Trade tariffs would continue to weigh on performance, as would foreign currency exchange rates and higher interest rates.

With the powersports vehicle manufacturer scheduled to report first-quarter 2019 earnings on Tuesday, April 23, let's take a look to see what investors might expect.

Snowmobiles racing through snow

Image source: Polaris Industries.

Tariffs taking a toll

Polaris Industries' first quarter is typically its weakest. While it does expect sales to jump 15% year over year, that's primarily because of the Boat Holdings acquisition. Yet it's also facing interest expenses about 40% higher year over year due to the debt it took on to make the purchase. Polaris also bought Larson Boat Group, but that was a much smaller acquisition ; in fact, it was the smallest Polaris has ever made, so its impact on its financial statements should be minimal.

Because of the impacts that tariffs, exchange rates, and higher interest rates will cause, management guided earnings to come in 15% to 20% lower than last year. Polaris got a reprieve, though, because tariffs were supposed to surge to 25% on a whole list of goods beginning on March 1, but the Office of the U.S. Trade Representative announced they would remain at 10% for the time being.

While Polaris hadn't included in its guidance the impact of what would occur if the tariffs had been raised, it did mention "headwinds" of an additional $60 million, which on a full-year run rate would have amounted to $80 million total.

The trade spat between the U.S. and much of the rest of the world is still a heavy burden as costs for commodities like aluminum and steel, key components of Polaris manufacturing processes, have risen because domestic producers have taken advantage of the higher costs for imports and raised their prices accordingly.

CEO Scott Wine explained the perverseness of the tariffs and its effects on Polaris Industries, pointing out it pays "a large tariff penalty that our foreign competitors avoid, only because we employ thousands of American workers to assemble these parts. Ironically, if we produced all of our vehicles in Mexico or Canada, we would be exempt" from the tariffs.

Even so, despite tariff rates not rising, the 10% imposition already in place is still costing the powersports vehicle maker an estimated $80 million to $90 million.

A hard ride

Off-road vehicle segment sales rose 7% in the quarter, driven mostly by gains in snowmobile sales, which helped lift companywide organic sales 4% year over year. Side-by-side vehicle sales were also up in the fourth quarter, but ATV sales were down. Similarly, Indian Motorcycle sales rose, but Polaris' three-wheeled slingshot continues to collapse, dragging down the segment 15%.

Like Harley-Davidson , Polaris is seeing sales of its heavyweight bikes fall sharply. Fortunately, it has a number of midsize bikes that have seen growth strong enough to offset the decline of their bigger brethren, allowing them to gain market share for the quarter and the year. The first quarter's winter months will be a tough slog again for Polaris in off-road and motorcycles, though snowmobiles ought to be a bright spot once again.

Another segment that likely won't have a sunny disposition will be the aftermarket. Polaris' purchase of Transamerican Auto Parts continues to go sideways, and revenues there were down 3% last quarter and only managed a 0.5% increase for the year. It expects TAP to turn it around this year with mid-single-digit percentage growth rates, but that could still take some time to work itself out.

Powering ahead

Unfortunately for Polaris Industries, many of the drivers affecting its business are out of its hands, particularly on the global stage. It is doing what it can to mitigate the damage being caused, but it is still going to impact earnings sharply this quarter.

Shares of the powersports vehicle maker are up 16% since the last quarterly report, but still down more than 20% over the past 12 months. Demand for its most important vehicles still seems to be intact, even as their respective markets remain suspect, giving Polaris an opportunity to surprise to the upside.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Polaris Industries. The Motley Fool has a disclosure policy .