Polaris (PII): Buy, Sell, or Hold Post Q3 Earnings?

Polaris has been on fire lately. In the past six months alone, the company’s stock price has rocketed 70.5%, reaching $65.88 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is now the time to buy Polaris, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free for active Edge members.

Why Do We Think Polaris Will Underperform?

We’re happy investors have made money, but we're sitting this one out for now. Here are three reasons you should be careful with PII and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

Examining a company’s long-term performance can provide clues about its quality. Any business can have short-term success, but a top-tier one grows for years. Unfortunately, Polaris’s 1.1% annualized revenue growth over the last five years was weak. This was below our standards.

2. Cash Flow Margin Set to Decline

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Over the next year, analysts predict Polaris’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 8.2% for the last 12 months will decrease to 3.8%.

3. New Investments Fail to Bear Fruit as ROIC Declines

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Polaris’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

Polaris doesn’t pass our quality test. Following the recent surge, the stock trades at 60.5× forward P/E (or $65.88 per share). This valuation tells us a lot of optimism is priced in - we think other companies feature superior fundamentals at the moment. We’d suggest looking at a dominant Aerospace business that has perfected its M&A strategy.

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