Take a Ride With Sizzling Polaris Stock

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I'm really not much of an outdoorsman, so you won't catch me off-roading in an ATV — flying over sand dunes, wind blowing in my air, screaming like a banshee. I don't like dust.

Thus, I'm not the primary customer for Polaris Industries (PII).

However, plenty of people would find such an activity thrilling … and the equipment behind such an activity makes up a surprisingly robust sector of the economy.

As a result, Polaris stock comes with a lot for investors to like — including just-released record third-quarter earnings and strong outperformance from Polaris stock.

Polaris Stock Looks Solid

Getting more specific, Polaris designs, engineers and manufactures off-road vehicles, including all-terrain vehicles and side-by-side vehicles, for recreational and utility use. The company also makes snowmobiles and on-road vehicles, including motorcycles.

While Polaris vehicles have plenty of utility on construction sites, farms, ranches and even in military situations, the recreational side of the business can’t be overlooked. Polaris products are affordable enough that even middle-income people can own them, while folks doing well financially can purchase them in even greater quantity.

Of course, Polaris also provides replacement parts and accessories — a nice segment since those are high-margin products.

In the most recent quarter, which PII just reported, the breakdown was as follows: 64% of sales came from off-road vehicles, 13% came from snowmobiles, 7% from on-road vehicles and 16% from accessories.

Add it all up, and Polaris did an impressive $1.1 billion in sales. That’s the first time in PII history that quarterly sales topped the $1 billion mark, thanks in part to impressive 25% year-over-year growth.

Of course, business has been booming on the revenue side for some time, though. From fiscal 2010 to fiscal 2011, sales jumped 30% year-over-year, while another 22% gain was tacked on in fiscal 2012.

Strong sales have trickled down to the bottom line with no problem, too. Net income popped 57% from 2010 to 2011, with another 38% growth coming in 2011. And in the just-reported third-quarter, Polaris earnings were up 24% year-over-year, and margins widened 90 basis points.

The business is doing incredibly well at producing operational cash flow, too, totaling $382 million for the first nine months of fiscal 2013 — a 50% increase over the same period a year ago. To top it off, PII boasts free cash flow of $190 million, $388 million in cash only $107 million in total debt.

That’s pretty amazing, because it means Polaris has been able to grow aggressively without incurring debt. And while manufacturing does not always yield huge cash flow and margin expansion, Polaris seems to have it down pat.

Especially in an economy where people are leaving the workforce in record numbers, wages are stagnant and people are moving away from grocery stores and towards the dollar stores, it's very impressive to see this kind of growth. It’s clear that Polaris has its enthusiasts, and they are still able and willing to pay for their hobbies.

For the cherry on top, PII lifted full-year guidance for the third time this year, expecting 2013 Polaris earnings to total between $5.30 and $5.37 per share. That’s a gain of 20% to 22% over 2012 … and analysts see another 20% increase on tap for 2014, along with 18% annual growth long-term.

The one thing to note: Polaris stock trades at 25 times expected 2013 earnings thanks to its stellar 60% year-to-date gains. Normally, I might shy away from something fully valued like PII … but it's been nearly impossible to find a growth stock trading anywhere close to a PEG ratio of 1. Polaris stock has a PEG of 1.4, which isn’t unreasonable given the track record and on-tap growth.

As a result, I would consider Polaris stock strongly as an addition to your growth stock portfolio.

As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.