by Susan J. Aluise | May 31, 2012 10:12 am
“Ah, summer,” Pulitzer Prize-winning author Russell Baker once mused. “What power you have to make us suffer and like it.”
Over the past several years, the recreation and sports-equipment industries have experienced summer’s magical powers as well as its recession-fueled sufferings. Thankfully for many of the industry’s strongest companies and their investors, a rebounding economy is leaving much of that recent suffering in the rear-view mirror.
In 2006, all was right with the world. Then came the Great Recession. From 2007 through 2009, the industry’s sales plummeted by about 40%, and companies on average laid off 50% of their workforce.
It’s hardly surprising that recreation took a hit. Consumers were in no mood to purchase pricey discretionary items such as pools, motorcycles or off-road vehicles (ORVs) in the midst of the toughest economy in decades and millions of vanishing jobs. But the depth of the damage to sales and earnings still surprised many observers. Many of the industry’s highest-profile companies felt lucky to survive the sector’s carnage.
But today the fortunes of key recreation and sports stocks are rebounding along with the economy. And now that summer has officially begun, a lot of consumers are giving serious thought to motorcycle road trips and off-road fun.
Here are three hot summer stocks — one motorcycle manufacturer, one ORV manufacturer and one swimming-pool products wholesaler — to play on the leisure sector’s revival:
This iconic American motorcycle brand has a lot going for it. With a loyal following, it has largely been able to fend off fierce competition from foreign competitors such as Honda (NYSE:HMC), Yamaha (PINK:YAMCY) and Suzuki. Still, Harley-Davidson (NYSE:HOG) got butchered right along with the rest of the consumer-discretionary sector during the recession. In the fourth quarter of 2009, revenue fell by 40%, and the company posted its first loss in 16 years.
Fortunately for Harley-Davidson, it hired ex-Johnson Controls (NYSE:JCI) exec Keith Wandell in 2009. That’s when things got interesting. Wandell, the first outsider to head HOG since the 1980s, began drawing a new road map for success that has aimed at driving the Harley-Davidson brand’s strengths and ditching all other distractions.
That strategy included selling back the company’s MV Agusta sports-bike subsidiary in Italy to its former owner and discontinuing its Buell performance-motorcycle line. Wandell also reduced the workforce by nearly 50% and rolled out the Harley brand in India. He’s now targeting a younger demographic for the Harley-Davidson line. In the past, the company’s heavy bikes typically have been geared to men over 35.
HOG has had a great run this year. Shares currently are trading around $47.50, more than 50% above their 52-week low last August. With a market cap of nearly $11 billion, the stock has a price-to-earnings growth (PEG) ratio of 1.3, indicating that it could be overvalued.
It has a forward P-E of 16, which is the industry average. The company’s earnings rose more than 40% in the first quarter, and its margins have improved year-over-year. Harley raised its dividend by 24% in February; the current yield is 1.3%.
Action to Take: I’m bullish on HOG because I’m comfortable with the direction Wandell is taking the company, though he ultimately will be judged on his ability to move aggressively into emerging markets. It’s also encouraging that a recent survey found second-quarter demand up 5% and Harley dealers’ inventories leaner than expected. I rank HOG a buy, with a price target of $55.
During the recession, installing a new swimming pool wasn’t high on most consumers’ list of priorities. So it’s no surprise that Pool Corp. (NYSE:POOL), the largest distributor of swimming-pool supplies and equipment in the U.S, saw its stock price sink from around $35 in January 2007 to around $11 just 26 months later.
The bad economy and the housing crisis combined to dry up new pool construction by as much as 80% compared with the market peak in 2005, and it has taken longer for this segment of the market to rebound compared with motorcycle and sports-products distributors. Challenges have continued in the sector in large part because home-equity financing dried up for those high-ticket backyard improvements.
But finally, swimming-pool construction is reviving, and industry insiders estimate annual growth of as much as 5% as the economy recovers and financing becomes more available. POOL is doing its part in that regard, too: Last year, it launched a partnership with Lending Club to invest $2 million into swimming-pool loans for consumers.
In the first quarter of this year, POOL reported a 16% increase in sales over the same period in 2011, and earnings rose 14%. Although those numbers were in large part due to unseasonably warm weather in the eastern U.S., the company has increased its earnings guidance for the full year to $1.75 to $1.85 a share, up from prior estimates of $1.69 to $1.79.
POOL currently is trading around $37, nearly 64% above its 52-week low last August. With a market cap of nearly $1.8 billion, POOL has a PEG ratio of nearly 1.5 and a forward P-E of over 20, both of which are higher than I’d like. The stock has a current dividend yield of 1.7%, and it has a one-year return of more than 28%.
Action to Take: I like POOL because the market finally is beginning to recover and the company’s financing partnership with Lending Club could pay off if the housing market doesn’t teeter back into the abyss. I think POOL is a buy, but I wouldn’t chase it.
Over the past three months, the stock price has bounced around between $35 and nearly $39, so I’d try to buy it on a dip. Since unseasonably warm weather drove earlier-than-usual sales, the market might expect lower second-quarter sales ahead of POOL’s July 18 earnings report.
Life is pretty good these days for Polaris Industries (NYSE:PII), a manufacturer of off-road vehicles and motorcycles. Polaris is poised for a pretty hot summer, particularly for a Minnesota-based company that still sells a lot of snowmobiles.
Polaris is a major player in the power-sports industry and a top company in terms of global ORV and snowmobile sales. PII is facing off against Harley-Davidson in the heavyweight-cruiser and touring-motorcycle niche with its Victory motorcycle line, as well as its acquisition of the Indian motorcycle brand. Polaris is also committed to low-speed, on-road vehicle with its investment in Oregon-based Brammo and its acquisition of Global Electric Motorcars.
From 2008 through 2009, its all-terrian vehicle (ATV) and snowmobile sales fell by 20%, and earnings dropped 14%. But Polaris made up for the slump by getting serious about efficiency: It has cut costs by 25% and increased manufacturing efficiency by nearly 10%.
In the first quarter, PII’s earnings rose 27%, blowing away Wall Street’s expectations. Sales of its Ranger RZR off-road vehicles and Victory motorcycles played a big role in delivering that strong performance. Overall, the company grew sales in the quarter by 25%, and Polaris has revised its full-year estimates higher.
The shares have been on a tear recently. At around $77.00, PII is trading more than 70% above its 52-week low last fall. With a market cap of nearly $5.3 billion, the stock has a PEG ratio of about 1.1, which is fairly valued, and a forward P-E of 19, which is a little higher than the industry average. The company has a current dividend yield of 1.9%.
Action to Take: I think Polaris is doing a lot of things right, and now would be a good time to buy. Although it set a new 52-week high of $83.63 in early May, I think this stock is taking a quick breather at $77 before getting a second wind. While the economy can and will give consumer-discretionary stocks like this one major fits and starts, I think PII has further to rise as long as there are no big upsets in the short term. I rank PII a buy, and my price target is $87.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.
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