G - Zacks Investment Research



|Polaris Industries Inc. |(PII-NYSE) |$44.79* |

Note: This report contains substantially new material. Subsequent reports will have changes highlighted.

Reason for Report: 4Q09 and FY09 Earnings Update

Prev. Ed.: December 10, 2009; Minor Changes

Brokers’ Recommendations: Neutral: 50.0% (4 firms); Positive: 50.0% (4); Negative: 0.0% (0) Prev. Ed.: 6; 3; 0

Brokers’ Target Price: $54.20 (↑ $0.87 from the last report; 5 firms) Brokers’ Avg. Expected Return: 21.0%

*Note: Though dated February 3, 2010, share price and brokers’ materials are as of February 2, 2010.

Note: A flash update on 4Q09 and FY09 earnings result (1/28/10)

Note: The tables below for Revenue, Margins, and Earnings per Share contain fewer brokers’ materials than the brokers’ materials used in the Valuation table. The extra figures in the Valuation table come from reports that did not have accompanying spreadsheet models.

Portfolio Manager Executive Summary

Polaris Industries, Inc. (PII) is a leading designer and manufacturer of all terrain vehicles (ATVs), snowmobiles, and motorcycles. The company has the No. 1 and No. 2 share of the Off Road Vehicles (ORV) and snowmobile markets, and is developing a motorcycle franchise.

Of the eight analysts covering the stock, four assigned neutral ratings and four rendered a positive rating. The analysts’ opinions are as follows:

Neutral or equivalent outlook (4/8 firms or 50.0%) – Target price is provided by one firm i.e. $45.00. The analysts with a neutral stance believe that over the long term, Polaris can achieve meaningful success with its new products driving up revenue and EPS growth, and manufacturing efficiencies boosting margins, however, over the intermediate term, a sluggish macroenvironment could negatively impact consumer discretionary spending, and ultimately limit the stock price’s expansion from the current level. Thus, based on the weakening fundamentals and uncertain credit environment, these analysts remain cautious toward consumer durable stocks. They also believe that the stock may suffer from some near-term uncertainty. The analyst based its valuation on P/E multiple or EV/EBITDA multiples.

Positive or equivalent outlook (4/8 firms or 50.0%) – These analysts provided a target price range from $53.00-$58.00. The analyst views the near-term fundamental trends to be difficult due to the overall macro economic environment and consumer weakness. However, the analyst continues to be positive on the PII brand, its management team, and long-term free cash flow. The analyst believes Polaris has done a good job of reducing its dealer and factory inventory and should be in a position to weather a downturn and show growth and operating leverage in the future. These analysts based their valuation on P/E multiple or EV/EBITDA multiples.

February 2, 2010

Recent Events

On February 3, 2010, PII announced its acquisition of swissauto Powersports. Based in Burgdorf, Switzerland, swissauto has expertise in designing and developing high-performance and high-efficiency engines and innovative vehicles. The acquisition will further strengthen Polaris’ global engine and vehicle design capability while also enhancing the company’s European presence.

On January 28, 2010, Polaris Industries Inc. announced its 4Q09 and FY09 financial results. Highlights are as follows:

• Net revenues decreased to $471.7 million and $1,565.9 million in 4Q09 and FY09 respectively from $523.6 million and $1,948.3 million in 4Q08 and FY08 respectively.

• Net income was $43.9 million or $1.31 per diluted share in 4Q09 versus $36.2 million or $1.13 per diluted share in 4Q08. In FY09, Net income was $101.0 million or $3.05 per diluted share versus $117.4 million or $3.50 per diluted share in FY08.

Overview

Brokerage firms identified the following investment merits and drawbacks of PII:

|Key Positive Arguments |Key Negative Arguments |

|Market Leader: Polaris is No. 1 in ORVs (includes both ATVs and Utility |Increasing Competition: Polaris competes with world-class |

|Vehicles), No. 2 in snowmobiles, and has a large opportunity in the |companies in each business segment. |

|motorcycle market. | |

|MVP program. Polaris has expanded its new dealer order and selling program |Consumer Spending: Consumer spending to remain weak throughout |

|to 50% of North American dealers. |2010, which will limit sales growth in both the U.S. and Europe. |

|New Product Innovations: PII has a strong pipeline of new products that |Decline in PII’s Business: There are jaded growth prospects in |

|will likely boost both its topline as well as its bottomline in the long |key business segments like the core North America ATV market and |

|term. |snowmobiles. |

|Diversified Product Portfolio: PII’s exposure to different end markets |Currency: Unfavorable exchange rates could negatively impact |

|provides a stable revenue stream and establishes a platform for growth in |revenue from the international markets. |

|new markets. | |

|Flexible manufacturing: PII has interchangeable manufacturing lines, which |Regulatory Issues: Polaris is subject to certain federal |

|allow it to adjust the production mix of ATVs, snowmobiles, and motorcycles |regulatory issues related to land access (i.e. national parks) and|

|to match demand trends while maintaining higher employee and asset |emission standards. |

|utilization rates. | |

|International Growth: Polaris enhanced its European distribution, |Credit Market Issues: The credit market issues could negatively |

|establishing a foothold to support its future growth initiatives. The ATV |impact consumer credit availability, as well as, the purchase of |

|market in Europe is approximately 20%-25% the size of the US market. |Polaris’s products. |

Based in Minnesota, Polaris Industries, Inc. (PII) is engaged in the designing, engineering, manufacturing, and marketing of motorized products for recreation, as well as, for utility, including all terrain vehicles (ATV), snowmobiles, Ranger utility vehicles and Victory motorcycles, together with related replacement parts, garments, and accessories. The company also markets a line of recreational apparel, including helmets, jackets, bibs and pants, and hats for its snowmobile, ATV, and motorcycle lines. It sells its products through a network of 2,000 dealers in North America, and 5 subsidiaries and 40 distributors in 126 countries. The company also provides purchase-related financing to retail consumers and dealers through its 50% equity interests in Household Finance and Polaris Acceptance. The company’s website is .

Note: The company’s fiscal year coincides with the calendar year.

February 2, 2010

Revenue

According to the company, sales decreased to $471.8 million and $1,565.9 million in 4Q09 and FY09 respectively from $523.6 million and $1,948.3 million in 4Q08 and FY08 respectively. The upside in revenue resulted from better than expected Off-Road Vehicle and PG&A sales. The company’s reports were in line with the Zacks Digest average figures.

International revenue was up 18% y/y in 4Q09, including a 21% increase in ORV sales internationally driven by a weak dollar and positive product mix.

Segment Revenue

Off Road Vehicles (ORV)

As per the company’s report, Off-Road Vehicle (ORV) sales in 4Q09 and FY09, which included both core all-terrain vehicles (ATVs) and Ranger side-by-side vehicles, decreased 12% y/y and 22% y/y to $282.8 million and $1,021.1million respectively. The company’s reports were in line with the Zacks Digest average figures. The decrease in 4Q09 results was due to the weakening consumer retail environment in North America as dealers continued to reduce core ATV orders in an effort to further reduce dealer inventory levels. As a result, core ATV dealer inventory levels in North America were 35% lower at the end of 4Q09 than at the end of 4Q08. North American retail sales for ORVs increased in the single digits percentage range for 4Q09 with side-by-side retail sales increasing in the mid-teens and core ATV retail sales decreasing in the mid-single digit range for the quarter. The improvement in the retail sales trends is an indication of the acceptance in the marketplace of the company’s new product introductions in the recent years.

International ORV sales increased 21% y/y in 4Q09, primarily due to the weak US dollar and positive mix benefit as higher priced side-by-side vehicles were shipped during 4Q09 compared with 4Q08.

For FY10, management expects ORV sales to be flat to up slightly with North America industry retail sales down 10%-15%. Management expects to outperform the industry at retail due to new products, military, and international expansion.

Analysts, in general, note that PII and all its competitors are facing challenges in core ATVs (non-utility vehicles), in the form of high gas prices, a difficult lending environment, poor consumer sentiment, and a deteriorating macroeconomic environment. However, they estimate that core ATVs remain an important market segment and note that Polaris plans to regain share and revitalize the category by offering higher-quality products, driving product innovation, improving speed to market, aggressively helping dealers manage inventory, and exploiting international opportunities.

Snowmobiles

As per the company’s report, Snowmobile sales decreased 14% y/y and 13% to $81.4 million and $179.2 million in 4Q09 and FY09 respectively. The decrease reflects the continued weakness in the consumer retail environment. The company’s reports were in line with the Zacks Digest average figures.

For FY10, management expects revenue to be down slightly to up slightly and will have additional insight following the completion of the snow season. Management expects North America snowmobile industry retail sales to fall 10%.

On Road/Victory Motorcycles

As per the company’s report, sales of the On-Road division, which primarily consists of Victory motorcycles, decreased 12% y/y and 44% y/y to $19.1 million and $52.8 million in 4Q09 and FY09 respectively. The decrease in 4Q09 results reflects the continued weak heavyweight cruiser and touring motorcycle industry and the company’s continued planned reduction in shipments of Victory motorcycles to dealers in North America to assist dealers’ efforts to further reduce inventory levels. North American dealer inventory of Victory motorcycles decreased 27% y/y in 4Q09. Victory motorcycles had strong retail sales during 4Q09, increasing in the low 30% range, a reflection of the initial acceptance of the new model year 2010 motorcycles and more focused attention on growing retail sales. The company’s reports were in line with the Zacks Digest average figures.

During 4Q09, Polaris continued to ship its new electric powered low emission vehicle, the Polaris Breeze, to its new neighborhood vehicle dealer channel in master planned communities in the Sunbelt region of the U.S.

For 2010, management expects the segment’s sales to be up over 50%. Management expects heavyweight motorcycle retail sales to decline 10%-15% with Victory gaining market share. Management also expects the North America Low Emission Vehicle market to increase mid-single digits.

Parts, Garments, and Accessories (PG&A)

As per the company’s report, PG&A sales increased 2% y/y to $88.4 million in 4Q09 and decreased 9% y/y to $312.7 million in FY09. The increase in 4Q09 results were due to increased snowmobile and RANGER side by-side related PG&A sales. The company’s reports were in line with the Zacks Digest average figures.

By business segment, 67% of PG&A sales came from off-road vehicles, 20% from snow, 5% from Victory, and 8% from other. By category, 55% of sales came from parts, 41% from accessories, and 4% from apparel.

Management expects PG&A sales to increase at roughly the same rate similar to the overall company’s sales in 2010, or 1-3% as product demand drives parts and accessories sales.

Outlook

The company expects 1Q10 and FY10 sales to o grow modestly, in the range of 1%-3% y/y.

Provided below is a summary of revenue as compiled by Zacks Digest:

|Revenue($MM) |

|Positive |50.0%↑ |

|Neutral |50.0%↓ |

|Negative |0.0% |

|Max. |$58.00 |

|Min. |$49.00 |

|Avg. Target Price |$54.20 ↑ |

|No. of Analysts with Target Price/Total |5/8 |

Metrics detailing current management effectiveness are as follows:

|Metric (TTM) |Value |Industry |S&P500 |

|Return on Assets (ROA) |13.34% |-0.95% |4.03% ↑ |

|Return on Equity (ROE) |59.15%↑ | -2.71% ↓ |12.13% ↑ |

|Return on Investment (ROIC) |26.34%↑ |-1.51% ↓ |5.37% ↑ |

The company’s ROA, ROE, and ROIC are higher than the market averages, (measured by S&P 500) of 4.03%, 12.13%, and 5.37%, respectively.

Capital Structure/Solvency/Cash Flow/Governance/Other

Cash Flow: Cash and cash equivalents improved to $140.2 million on December 31, 2009, compared with $27.1 million on December 31, 2008.

Net cash provided by operating activities for the year ended December 31, 2009, increased slightly to $193.2 million compared with $175.8 million in 4Q08. The decrease in accounts payable and accrued liabilities, were the primary reasons for the increase in cash flow provided by operating activities, partially offsetting the decrease in inventories, accounts receivable and current deferred tax assets. Net cash used for investing activities decreased to $29.7 million during FY09 compared with $69.7 million in FY08, due to reduced capital expenditures. Net cash flow used for financing activities decreased to $50.4 million for FY09, compared with $142.2 million for FY08. The decrease was primarily due to the elimination of open market share repurchase activity in 2009.

Management expects capital expenditure to be in a range of $50-$55 million for FY10.

Dividends: The company paid dividends during FY09 totaling $50.2 million, compared with $49.6 million in FY08. The company recently announced a 3% increase in the regular quarterly cash dividend, which represents the 15th consecutive year of Polaris increasing its dividend, effective with 1Q10 dividend payment.

Share Repurchase: During 4Q09, the company spent $4 million on share repurchases under its existing share buyback program. In 2009, Polaris spent just $5 million on share repurchases, versus the 2.5 million shares repurchased in 2008 for an investment of $107 million. Polaris currently has authorization from the board to buy back an additional 3.7 million shares. However, management plans minimal share repurchases in 2010, given the lack of visibility related to the direction of the overall economic environment.

Debt: Borrowings under the credit agreement were $200.0 million on December 31, 2009 and 2008, which leaves $50.0 million available for borrowing under the company’s $450.0 million credit agreement.

Credit Markets: Management feels comfortable with its retail and wholesale financing position. On the wholesale side, Polaris has capital at risk through a partnership with GE. However, on the retail side, Polaris does not take risk, but has relationships with various third-party lenders (HSBC, GE, and Sheffield).

The company reported that availability of retail credit financing has stabilized and remains at acceptable levels through its relationships with HSBC Bank (“HSBC”), GE Money Bank (“GE”) and Sheffield Financial (“Sheffield”), which provide retail revolving and installment financing credit to the consumers of the United States. During 4Q09, 54% of consumer retail credit loan applications from Polaris customers were approved by HSBC, GE or Sheffield, which has improved from its approval rates of 52% in 3Q09. Additionally, 31% of Polaris’ retail customers in the United States financed their Polaris product purchases through HSBC, GE or Sheffield, which declined sequentially from 35% penetration rate in 3Q09.

Balance Sheet: Receivables decreased 8.0% y/y in 4Q09. Factory inventory declined 19% y/y to $179.3 million in 4Q09 as the company continues to make adjustments to its production and operations in response to the weak retail demand trends. Management expects further inventory declines in 2010 as well as further inventory reductions at its dealers.

Dealer inventories decreased 24% in 4Q09, as management remains committed to aligning inventory with demand across all product segments. Management expects to continue to lower dealer inventories in FY10 with the expansion of the Max Velocity Program (MVP). MVP is essentially a "pull model", which encourages smaller, more frequent orders from dealers. The desired result is lower dealer inventory, as well as, increased speed to market and market share for Polaris. The program is at present being used at approximately 50% of North American dealers.

Over time, management believes that it could potentially expand MVP to 70-80% of its unit volume. Given that MVP dealers typically carry lighter inventory loads than semiannual order cycle dealers, the firm (Raymond James) believes that further expansion of the MVP would have positive long-term effects on both the factory (more just-in-time production; quicker turnover of capital) and the dealer network (lower flooring bills, fresher inventory).

Adjacent market opportunities

Military: Polaris Defense sales were up well over 50% y/y in FY09. The company secured several orders and new customers including a contract to supply Ranger Crews for the National Guard. Management believes that military sales are a high-margin growth opportunity. The company anticipates 20-30% growth in military revenue in 2010.

Low Emission Vehicles: The recently-introduced Breeze, an electrically powered neighborhood vehicle, remains a modest growth driver in 2010. Management has quantified the neighborhood vehicle market at around 35,000 units, and believes that it is a growth market due to the long-term trend of migration into the types of areas, where these vehicles are used. The market is fragmented and underserved with very few purpose-built products.

Bobcat Alliance: Polaris entered a strategic alliance with Bobcat in early 2009. The first phase involves selling a differentiated Polaris Ranger product through the Bobcat dealer channel. Phase two involves combining the two companies' capabilities to co-develop and supply new products to the marketplace. Management expects to begin generating revenue and profit in the 2H10.

Acquisition: Management reiterated its plans for at least one acquisition in FY10, as long as it enables the company to drive profitable growth and value for shareholders. Management is also examining acquisition possibilities outside of the powersports industry.

One analyst (Wells Fargo) believes that an acquisition will likely be in an adjacent category in Europe that includes both distribution and manufacturing components.

International Expansion: Management is intensely focused on driving global growth and reiterated a commitment to expand the international footprint to greater than 25% of PII revenue over the next five years, both through organic means as well as through acquisitions. The strategy is to continue to expand the current platform in Europe, the Middle East and Africa and establish a presence in new markets including China, Brazil and India.

Product Line detail for FY10: Despite the weak economy, PII introduced 34 new products in 2009, leaving them positioned for continued market share increases in the future. In addition, in 2009, PII invested in On-Road division to distribute products in new international markets, such as China and Brazil. Although these markets will take time to ramp, international venues provide an attractive growth profile.

Management believes FY10 will be an important year for the On-Road division and it will also accelerate its efforts to drive retail sales and profitable growth in Victory motorcycle business. It will also accelerate growth in its new low emission vehicle product line.

One firm (KeyBanc) believes that PII will remain focused on the On-Road division (Victory and LEV business) in 2010 and beyond, and could provide an attractive growth opportunity going forward.

February 2, 2010

Potentially Severe Problems

There are none other than those discussed in other sections of this report.

February 2, 2010

Long-Term Growth

Long-term growth rates, for the next 3-5 years, is 10% provided by two analysts (FTN Equity Capital, Wells Fargo) (↔ as the previous estimate).

PII continues to believe that adjacent markets, including the military business (currently $40 million-$50 million in sales) and eventually the recently announced Bobcat partnership, present compelling long-term growth opportunities. Management expects the military business to grow considerably over the next several years, tapping into the estimated $650 billion of government spending, by leveraging current line of vehicles, creating new products to serve more markets and expand to other government agencies (Homeland Security, Department of Interior, etc.) and potentially the U.S. foreign military allies. Overall, growth through adjacencies (including military, Bobcat and low-emission vehicles) is expected to generate incremental revenue in the range of $100 million-$300 million over the next five years.

The analysts believe that the company’s commitment to lead in innovation, as evidenced by the introductions of Victory Vision Street, Victory Vision Tour, and Ranger RZR, will continue to differentiate it from its competitors and provide the company with sustainable long-term growth opportunities. The analysts note that core ATVs remain the company’s most important market segment, and the company plans to regain share and revitalize the category by offering higher quality products, as well as through more aggressive promotions and more effective advertising.

One analyst (BMO Capital) believes that the company will be able to achieve manufacturing efficiencies that will help it meet its long-term goals, although the analyst believes that it needs to generate greater unit volume in order to realize the full benefits of these efficiencies, something which is not expected in the near term owing to the difficult operating environment and consumer credit remains tight.

Another analyst (Key Banc) believes that though the On-Road segment only constitutes a small portion of consolidated sales currently ( ................
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