With supply chain easing, Polaris sees quarterly profits increase 63%

Polaris on Tuesday said its third quarter profits were up 63% and expects sales to stay strong the rest of the year. However, the company also acknowledged some softness in demand for some of its recreational vehicles.

"Our results were bolstered by easing supply chain headwinds that enabled us to increase ship volumes and take advantage of our strong pricing strategy, resulting in record sales in the quarter," said Mike Speetzen, Polaris' chief executive, in a company news release.

The Medina-based powersports company's revenue grew 32% to $2.34 billion as supply chain improvements helped the company ship more vehicles to dealers and customers. Analysts had expected sales of $2.2 billion.

Polaris earned $186.3 million, or $3.10 a share, in the third quarter compared to $114.6 million, or $1.84 a share in the same quarter of 2021. Adjusted earnings of $3.25 a share were well ahead of expectations.

As supply chains improved and components finally made it to Polaris plants, workers could move quickly to ship products that they had set aside in rework lines, especially among on-road products, the company said.

The softening of demand is hitting some recreational vehicle and lower-priced products, Speetzen told analysts during a call. But demand in utility markets is expected to remain strong as agriculture, government and commercial customers are less sensitive to changing economic conditions.

Sales in the off-road segment at Polaris were up 33% to $1.7 billion, while the gross profit margin for the segment increased from 22.3% in the third quarter last year to 25.7% this quarter. Higher pricing and a favorable product mix overcame a decrease in North American retail sales.

Polaris' boat sales saw the highest sales increase at 42%.

The high increase in demand for outdoor products across categories during the pandemic may mean lengthy tailwinds. The replacement rate and increase in new customers will likely recalibrate, and even if they are above pre-pandemic levels, it still means tough comparable financial numbers.

Inflation continues to be a concern, and investors will hone in on forward-looking comments from Polaris and its peers over the next several weeks for signs which way short-term demand is headed.

"Similar to our other leisure coverage, we think investors are more concerned about the macro environment and forward-looking company commentary," wrote Gerrick Johnson, an analyst for BMO Capital Markets, in a note prior to Polaris reporting their third quarter results.

Last week, Winnebago Industries reported strong fourth quarter results but its stock fell 10% on the day after the company signaled that rising interest rates and macroeconomic conditions may soften demand in 2023 for recreational vehicles.

"Looking forward, our diverse portfolio, commitment to innovation, strong financial position and track record of successfully navigating in various operating environments gives me incredible confidence in Polaris' ability to deliver long-term profitable growth and shareholder value," Speetzen said in the release.

Shares of Polaris closed Tuesday up 3.7% at $97.93 on on a day the broad market Nasdaq composite index was up 2.3%.

Pentair also beats expectations

Pentair, which is based in London but whose management offices are in Golden Valley, also exceeded analyst expectations for the third quarter.

The provider of residential and business water solutions earned $115.4 million, or 70 cents a share in the quarter, down from $143.6 million, or 86 cents a share in the same quarter last year. However, adjusted earnings per share were 99 cents, an 11% increase over last year and above the consensus expectation of 93 cents.

Pentair Chief Executive John Stauch noted demand for the products could soften next year.

"Given the acceleration of inventory correction in our residential channels, coupled with headwinds from foreign exchange and higher interest rates, we expect volumes to continue to moderate for the next few quarters," Stauch said in a release.

Pentair's revenue may still increase next year as pricing actions this year continue to take effect for the rest of 2022 and into 2023.

In the third quarter, Pentair also closed on its $1.6 billion acquisition of Manitowoc Ice. In 2021 Manitowoc generated more than $300 million in annual revenue. The company has 800 employees and more than 200 models of ice machines.

Stauch said in the release the integration of Manitowoc was "off to a good start."