Polaris’s stock price has taken a beating over the past six months, shedding 23% of its value and falling to $59.58 per share. This was partly driven by its softer quarterly results and might have investors contemplating their next move.

Even though the stock has become cheaper, we don't have much confidence in Polaris. Here are three reasons why we avoid PII and a stock we'd rather own.

Why Do We Think Polaris Will Underperform?

Founded in 1954, Polaris (NYSE:PII) designs and manufactures high-performance off-road vehicles, snowmobiles, and motorcycles.

1. Long-Term Revenue Growth Disappoints

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, Polaris grew its sales at a weak 2.9% compounded annual growth rate. This was below our standards.

2. EPS Trending Down

We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.

Sadly for Polaris, its EPS declined by 7.3% annually over the last five years while its revenue grew by 2.9%. This tells us the company became less profitable on a per-share basis as it expanded.

3. New Investments Fail to Bear Fruit as ROIC Declines

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

We typically prefer to invest in companies with high returns because it means they have viable business models, but the trend in a company’s ROIC is often what surprises the market and moves the stock price. Polaris’s ROIC has decreased over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

Polaris falls short of our quality standards. Following the recent decline, the stock trades at 11.7× forward price-to-earnings (or $59.58 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are more exciting stocks to buy at the moment. We’d suggest looking at Google, whose cloud computing and YouTube divisions are firing on all cylinders.

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