By Michael Elkins
UBS downgraded Polaris (NYSE:PII) to a Neutral rating (From Buy) and cut the stock’s price target to $112.00 (from $165.00), driven by lower ORV shipment estimates, and a slightly lower gross margin as a result of near-term retail disappointment and risk for market share loss for PII.
UBS analysts wrote in a note, “We see risk to guidance that retail sales would be positive in Q4. We also believe that the top-line opportunity of restocking the channel will be mostly behind after Q1, as our dealer checks indicate much better inventory availability in the dealer network outside of a few of the higher-end SSV models. Additionally, we believe PII must work to defend its market share over the next several quarters given competitiveness from not only BRP’s production growth, but also from smaller OEMs that compete on price. While investor sentiment heading into Q4 results has been bearish and may therefore see a covering rally after results, our rating change goes beyond just Q4 results.”
Last week, a UBS dealer panel had Polaris retail range from down to flat to up, since they all had different bases depending on when they got inventory in the prior year. However, broader preliminary channel checks outside of just the dealer panel suggested that Polaris may not have had the positive retail for Q4 that it initially indicated. Overall industry ORV demand, according to the checks, continues from the consumer, with the usual seasonal slowdown, but dealers anticipate near-term ORV sales will remain at levels well above pre-pandemic.
UBS’ 2023 revenue estimate for the company is unchanged at $8.77 billion, above consensus of $8.43B, and 2023 ORV revenue growth estimate also remains unchanged at +2% YOY. Gross margin estimates are unchanged at 23.7% (vs. Street's 23.4%) though UBS lowered operating margin estimates to 9.3% from 10.3%. As a result, 2023 EPS estimates move to $9.98 from $11.17 prior, in line with consensus of $9.92.
Shares of PII are down 1.84% in premarket trading on Friday.