Has Polaris Industries Become the Perfect Stock?


Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Polaris Industries (NYS: PII) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.

  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.

  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.

  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.

  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.

  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Polaris Industries.


What We Want to See


Pass or Fail?


5-Year Annual Revenue Growth > 15%



1-Year Revenue Growth > 12%




Gross Margin > 35%



Net Margin > 15%



Balance Sheet

Debt to Equity < 50%



Current Ratio > 1.3




Return on Equity > 15%




Normalized P/E < 20




Current Yield > 2%



5-Year Dividend Growth > 10%



Total Score

6 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Polaris Industries last year, the company managed to double its score. Reduction in the company's debt and a fast-growing dividend were responsible for the boost, even as the shares have risen more than 25% over the past year.

Polaris has an unusual mix of businesses that fit very well together. On one hand, it makes its Victory line of motorcycles that goes up against Harley-Davidson (NYS: HOG) and other motorcycle manufacturers. But Polaris also makes snowmobiles, all-terrain vehicles, and other off-road products, giving rival Arctic Cat (NAS: ACAT) , Honda Motor (NYS: HMC) , and other competitors a run for their money.

With a warm winter, you'd think that Polaris would have suffered during its snowmobile season. Certainly, some other winter-dependent companies took their lumps, such as Vail Resorts (NYS: MTN) and its ski business, which led to a 15% drop in net income in its first quarter. But the company had solid sales later in the season, and as a result, Polaris held up much better than some would have expected. In fact, the first quarter was so strong for the company that it raised its guidance for the entire 2012 year, helping to push the stock higher.

With the addition of Indian Motorcycles in the past year, Polaris has broadened its product line and is clearly still aiming for growth. At its current valuation, Polaris needs those opportunities to pan out, but if they do, the stock still has some room to run.

For Polaris to keep improving, it needs to sustain revenue growth and work on getting its brand awareness up in order to support higher margins. If it can succeed, Polaris could get closer to perfection in the near future.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

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At the time thisarticle was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Arctic Cat. Motley Fool newsletter services have recommended buying shares of Vail Resorts and Polaris Industries. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.

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