Thu Mar 27 2014
Live Index (1448 articles)

New American Classic Has the Potential for Double-Digit Returns

When you think of classic American brands in the transportation space, you think of companies like General Motors (NYSE: GM), Ford (NYSE: F) and Harley-Davidson (NYSE: HOG). But true motorcycle aficionados like me think of another classic American brand — Indian Motorcycles.

In fact, Indian Motorcycle actually predated the uber-popular Harley-Davidson, as it was America’s first motorcycle brand, founded in 1901.

The brand’s history has been a difficult one. It has had multiple owners, has undergone bankruptcy, reorganization, and a whole lot of lost years that nearly sent it into the dustbin of transportation history.

But thanks the efforts of modern-day American transportation star, Polaris Industries (NYSE: PII), Indian Motorcycles is back on the war path.

Last year, at the annual Sturgis Bike Week, Polaris unveiled its new Indian Motorcycle models designed and priced to take a bite out of Harley-Davidson’s cruiser bike dominance. This next iteration of Indian bikes is, in my opinion, a great combination of classic Indian style and modern motorcycle technology.

The excitement over the new motorcycles, as well as great financial metrics from Polaris’ other products lines, such as off-road vehicles, snowmobiles, Victory motorcycles, small utility vehicles, and parts and accessories, helped PII shares surge nearly 70% in 2013. Yet so far in 2014, the stock is down about 5%.

In an interview Tuesday with Fox Business anchor Maria Bartiromo, Polaris CEO Scott Wine spoke about how the power sports consumer has “exhibited extreme resiliency over the last four years,” and that has helped Polaris continue to grow despite the overall reluctance of consumers to get back to pre-recession spending on big-ticket discretionary items.

Wine also said the company is seeing its strongest gains in the off-road vehicle segment, with sales increasing at a brisk pace of 16% year over year in the fourth quarter. That revenue, along with strong Indian sales and healthy snowmobile sales, helped Polaris enjoy a 23% year-over-year spike in Q4 net income to $ 108.7 million.

Technically speaking, PII saw a big run higher in the latter half of 2013. Those gains were followed by the aforementioned decline in 2014, which sent PII sliding back below its 50-day moving average.

Since early February, however, shares have come back into fashion, and now trade near the $ 137 level. I think PII is a buy at current levels.

Overall consumer sentiment is improving. The Conference Board reported Tuesday that consumer confidence jumped to 82.3 in March, up from 78.3 last month, as people were more upbeat about future job prospects. This is the highest reading for the index since January 2008. And the Federal Reserve recently reported that U.S. household net worth hit a record high.

I think a continued resumption in consumers’ willingness to spend on power sports items is a trend we will see as the weather warms in spring. That, I suspect, will be a key fundamental driver for the company, and a driver for the shares that could power them well into new high territory over the next several months.

Recommended Trade Setup: 

– Buy PII at the market price
– Set stop-loss at $ 126.29, approximately 8% below recent prices
– Set initial price target at $ 151 for a potential 10% gain in 12 weeks

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