Fitch revises Polaris’ outlook to negative, affirms ’BBB’ rating

Investing.com -- On Monday, March 31, 2025, Fitch Ratings revised the outlook for Polaris (NYSE:PII) Inc., a leading manufacturer of powersports vehicles, to Negative from Stable, while affirming its Long-Term Issuer Default Rating (IDR) at ’BBB’. The ratings are applicable to $500 million of Polaris’ senior unsecured notes.

The revision in outlook reflects Polaris’ underperformance against Fitch’s expectations over the past year and the possibility of its credit metrics remaining below Fitch’s negative sensitivities for an extended period. The company’s EBITDA margin, Free Cash Flow (FCF) margin, and leverage metrics have been weaker than expected, mainly due to a sharp cyclical decline seen across the powersports industry.

Polaris, along with the broader powersports industry, is experiencing a sharp cyclical demand decline. Factors such as prolonged inflation, high interest rates, and weakened consumer confidence have led potential buyers to postpone purchases of high-priced discretionary powersports vehicles. In 2024, Polaris’ wholesale shipments were down 21% compared with an 8% decline in retail volumes. The company increased targeted promotions to help dealers further reduce inventories. With dealer inventories now nearing optimal levels, Polaris expects shipments in 2025 to align more closely with retail volumes, which could also allow it to reduce promotional levels.

Polaris is exposed to enacted or proposed tariffs. The company assembles off-road vehicles (ORVs) with about $2.0 billion in annual sales in Mexico. It also sources about $500 million in components annually from China, with about half being delivered to U.S. plants and the other half going to Mexican plants. The company imports less than $50 million of products from Canada annually. Polaris is also subject to steel and aluminum price volatility, but about 60% of these purchases are hedged.

Despite the challenges, Fitch expects that most of the actual or potential tariff effects are manageable, with the greatest effect being a potential tariff on USMCA-compliant imports from Mexico. The company has stated it could take various actions to mitigate the effects of tariffs, including certain operational changes and pricing actions, among others. However, higher pricing would likely reduce both retail and wholesale volumes, prolonging the demand weakness seen over the past year. A prolonged period of demand weakness could increase the risk of a ratings downgrade.

Polaris’ product offerings are diversified, covering a range of on-road, off-road, and marine segments, including all-terrain vehicles (ATVs), utility terrain vehicles (UTVs), snowmobiles, motorcycles, autocycles, and boats. This diversification reduces the seasonal and geographical demand volatility experienced by more pure play powersports manufacturers. However, the company’s geographic concentration is high, with over 79% of its 2024 revenue coming from the U.S.

Fitch expects Polaris’ EBITDA leverage to rise toward the upper 3x range by the end of 2025, as the cyclically driven decline in sales and EBITDA more than offsets an expected decline in debt. However, Fitch expects leverage to decline below 2.0x by the end of 2027, as EBITDA grows and the company uses FCF to reduce debt. Debt reduction is a top near-term priority, and the company had $900 million of term loan debt at the end of 2024 that could be prepaid without penalty.

Fitch expects Polaris’ FCF to grow as market conditions recover and the company gains traction on its cost initiatives. During the past year, Polaris reduced headcount by 10%, including 20% at the VP level. Fitch also expects working capital and reduced capex to contribute to FCF growth. Fitch expects FCF margins to run near 3.0% over the next several years, with higher margins over the longer term as market conditions normalize.

In terms of capital allocation, Fitch expects the company to prioritize debt reduction over the intermediate term as it works to bring net EBITDA leverage down to the 1.0x-2.0x range. However, the company also values its dividend aristocrat status and will likely look to continue raising its dividend on an annual basis. Longer term, once leverage is back to the targeted range, Fitch expects the company will look to deploy excess cash toward share repurchases or bolt-on acquisitions.

Polaris has a strong competitive position in the powersports market, with highly recognized brands and a loyal customer base. Compared with Harley-Davidson (NYSE:HOG), Inc. (BBB+/Stable), Polaris is larger and more diversified. However, Polaris’ EBITDA and FCF margins are lower than Harley’s with EBITDA leverage more than 2.0x higher than Harley’s motor company leverage.

Compared with Brunswick (NYSE:BC) Corporation (BBB/Negative), Polaris is significantly more diversified. However, Brunswick’s EBITDA and FCF margins are higher than Polaris’, while Brunswick’s EBITDA leverage is lower. Brunswick is a pure-play marine manufacturer focused on manufacturing boats and boat propulsion systems. As such, Brunswick’s boat business is more than twice the size of Polaris’.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.