Polaris

Polaris' second-quarter results included sales growth of 9%, to $2 billion, and adjusted EPS of $1.97, including a $0.96 benefit from tariff refunds. Operational (excluding tariff refund) gross margin expanded 82 basis points to 20%, benefiting from higher prices, lower promotion, and improved mix.

Why it matters: Demand persisted in Polaris' key powersports segment (85% of sales). Polaris' North American retail sales increased 5% in ORV (ex-youth), ahead of the low-single-digit rate for the industry, marking share gains for the fifth consecutive quarter. Commercial sales were called out as a bright spot (unquantified), due to infrastructure-related demand (data center construction projects). We think Polaris is uniquely positioned to benefit given its commercial dealer network with a product line (Pro XD) catering to work site needs. From a profit perspective, operational EBITDA expanded 180 basis points to 8.2%, aided by better pricing and absorption. We contend higher pricing is a result of solid inventory management, with dealer units down 8%, ensuring wholesale aligns with retail, which limits discounting.

The bottom line: We expect to raise our $70 per share fair value estimate for wide-moat Polaris by a low-single-digit rate to account for an improved 2026 outlook and the benefit from the recent tariff refund. We view shares as appropriately priced. Polaris raised its 2026 EPS outlook to $3.00 to $3.10 from $1.60 to $1.70, mainly on account of the $0.30 upside in powersport and marine sales in the quarter and the tariff rebate. Sales of $7.3 billion-$7.5 billion implies low-single-digit sales growth in the back half of 2026. With around 70% capacity utilization at its factories, we see potential for operating leverage as throughput rises. We forecast operational EBITDA to rise above 7% in 2026 (from 5.7% in 2025), and we see a path back to double-digit levels by the end of the decade (last achieved in 2023).

We are raising our fair value estimate per share to $73 from $70 after incorporating second-quarter results and an improved fiscal 2026 outlook. Polaris reported second-quarter sales of $2 billion and adjusted EPS of $1.07, benefiting from a tariff refund that contributed $0.96 per share. As such, Polaris raised its prior 2026 outlook to include sales of $7.3 billion to $7.5 billion (from $7.15 billion to $7.3 billion) and EPS of to $3.00-$3.10 (from $1.60-1.70). Our updated outlook includes sales of $7.4 billion (up from $7.3 billion prior) and EPS of $3.09 ($1.66 prior).

Thankfully, Polaris remains in an appropriately stocked position at dealers, positioning the firm for lower inventory clearance risk in the near term. Still, we expect a more competitive long-term environment in off-road to remain, leading to terminal gross margin in the segment of 23%, versus 29% in the five years leading up to the pandemic. Increased innovation cadence from peers across the category is likely to persist, limiting upside potential. We continue to believe the recent deterioration in profitability was not self-inflicted, given that the entire industry has suffered, as indicated by North American retail sales metrics that have struggled to find growth.

With industry retail sales expected to be flat in 2026, consumer takeaway should normalize, allowing Polaris to return to our long-term growth algorithm, which incorporates average sales growth of 3%-4%. To reach this growth, we forecast that sales for powersports can rise at 4%, while marine grows 3% in the long term. This cadence of sales should outpace our most recent five-year forecast for powersports industry growth (averaging less than 1%), assuming consumer spending patterns on recreational goods and vehicles and conventional outdoor products return to a historical proportion of wallet, implying modest market share gains.

We expect that credit will remain available to wholesale and retail channels at current levels and that management will acquire like-minded companies (which we include in our model upon announcement). We see gross profit margin expansion of around 350 basis points over the next decade from 2025 levels, to 23%, while net income margin grows to 5%. We think costs will stabilize and that the marketing ratio will stay around 7% over our forecast, in line with the five-year historical average. Polaris has historically generated returns on invested capital well above our weighted average cost of capital assumption (9%) and should be able to maintain an average adjusted ROIC of 11% over the next decade, affected by tariffs and cyclical pressures in the near term.

We believe Polaris has established a wide economic moat, delivering healthy adjusted returns on invested capital averaging 11%, including goodwill, during the past five years. We forecast it will outearn its cost of capital over the next two decades, particularly as volumes and expenses normalize. More than 70 years ago, Polaris started to build its reputation and brand by producing snowmobiles. Since then, it has expanded into all-terrain vehicles, motorcycles, boats, and electric vehicles, building a recreational and utility vehicle powerhouse. Evidencing its intangible assets, Polaris has amassed leading market share positions in the categories in which it operates.

We believe much of the brand’s staying power is contingent upon continued spending on research and development to ensure the firm has a pipeline of compelling new products to entice its addressable market. We perpetually consider the company's ability to protect (and gain) market share and maintain brand goodwill in the key powersports segment to determine whether the brand equity is at risk. Hiccups in the quality of innovation, along with an increasingly competitive environment, could put the company's wide moat at risk, but we think Polaris has taken the right steps to protect its moat, with disciplined quality assurance protocols and well-developed manufacturing processes to prevent pervasive product recalls and deliver compelling products. We expect Polaris to spend around 4.5% of sales over the next five years on such efforts; this represents about $350 million annually, in line with the 4.3% it has spent over the last decade and tracking in tandem with peers like wide-moat BRP. We contend that when consumers replace or think about purchasing products in the snowmobile and off-road categories, they want the best products with the newest technology, which is what Polaris provides, yielding stability in pricing thanks to solid brand perception. Indeed, enterprise-level mix and price have averaged 6% growth in the most recently reported five years (through 2025), even as average volume fell 3% (including the 21% decline in 2024).

Such investment efforts have allowed Polaris to hold a solid leadership position in the off-road market (ATVs and SBS), indicative of a healthy brand intangible asset. The powersports segment constituted 82% of 2025 sales. Impressively, in ATVs, Polaris’ market share has averaged more than 30% over the past 10 years. This compares with BRP’s mid-20s share and Arctic Cat's low-single-digit share, according to Powersports Business and our estimates. Forthe side-by-side market, Polaris has amassed a mid- to high-30s portion of the market by our estimate, versus BRP’s 30% stronghold.

Polaris’ presence in snowmobiles remains similarly robust, signaling brand strength in the segment. We think Polaris’ market share amounted to more than 30% in 2025, a level it’s been able to hold over the last decade. The snowmobile industry is composed of only three manufacturers making up most units produced (Polaris, BRP, and Arctic Cat), placating concerns that share shifts will degrade anytime soon, especially with Polaris remaining dedicated to innovation in the category. This is also helped by the elimination of Yamaha, exiting the segment after model year 2025, and Arctic Cat, a brand that has been shuffled between owners in recent years, effectively leaving the industry with an duopoly. Still, we forecast Polaris’ sales to largely grow in line with long-term industry growth of 4% through 2033 (according to Cognitive Market Research).

Quantitatively, brand resonance with consumers can be ascertained via pricing power, which indicates willingness to pay up for new products. This ultimately surfaces in gross margin performance. Polaris’ average gross margin over the last five years was 22%, versus 25% in the five years prior, a modest downtick considering the firm has faced significant inflationary headwinds, tariffs, and negative mix implications. Still, this metric is in line with BRP, where gross margin averaged 24.6% over its last five fiscal years.

Also supporting Polaris’ brand image with consumers is a robust dealer network of 2,500 global locations that has been built over the past seven decades. Most of these are not exclusive Polaris dealers, but we think new competitors would have to develop a high-volume business to garner any power with retailers and move significant inventory at retail. It would also take time to set up a new manufacturing facility, produce product and inventory, and have dealers commit to selling these new products. As such, we don’t think any new potential entrants stand to erode Polaris’ relationships with its distribution base.

We think the company’s economic moat is predicated on its brand strength, and that its prior low-cost advantage has unwound given the firm's inability to defend its cost structure in recent years. Admittedly, the volume of product that Polaris manufactures and ships remains leading when compared with other operators in the industry, with $7.1 billion in sales in 2025, modestly above the CAD 8.3 billion ($6.1 billion) BRP delivered, but significantly more than some smaller, niche players in the market. However, this has not resulted in expense resilience, as evidenced by operating margins that have fallen to a low-single-digit rate in 2025 from an average of 10% in the decade ending 2022.

We still believe the replication of the manufacturing footprint could be difficult, given the amount of time it would take to build a network of efficient facilities and the amount of capital required to execute it, providing a barrier to entry. For reference, to facilitate Polaris’ production growth, capital expenditures averaged $292 million over the past five years (3.6% of sales), up from averaging $215 million during 2014-18, and we expect this figure to average $257 million over the next five years as costs are rightsized with demand.

Polaris has historically had a strong reputation for innovation, and new product lines and strategic acquisitions have supported solid market share in both strong and difficult environments.

Profit margins could tick up faster than we expect with a return to volume growth from the higher-margin, sizable powersports segment.

Management is focused on operating as a best-in-class manufacturer. With perpetual improvement at existing facilities, the pursuit of lean initiatives should support operating margin improvement as consumer demand normalizes.

Higher inflation and tariffs could affect costs. Rising commodity prices, labor, or logistics expenses could hurt profitability.

Polaris competes with formidable brand names, such as Barletta in the marine industry and BRP in the snowmobile and ATV sectors, which also innovate rapidly in an effort to take market share.

Business depends on credit availability at the wholesale and retail levels. The withdrawal of any financing sources, tightening of lending standards, or higher interest rates could prevent some inventory from moving easily through the channel.