DGI Adventure 10-29-16 Sold Cash Secured Put + Investment Thesis – Polaris Industries Inc. (PII) – $75.00 strike – Nov 18 Expiration

This trade was actually executed on Tuesday 10/25/16. I didn’t get a chance to write about it until today.

Please visit the core philosophies article on my investment thesis process for a deeper explanation of the components of this article.

I have updated the portfolio and income tracker back at the mothership to reflect this position.

Dividend Cycle

PII should go ex-div at the end of November. The quarterly dividend payment has been $0.55/share for the last three quarters, so I expect the next quarterly payment to be the same. Thanks to 21 years of consecutive dividend increases, PII is a dividend contender, so I fully expect the following quarter’s payment to represent a raise.

This contract should expire comfortably before the next ex-dividend date, and the premium payment is the equivalent of more than two quarterly payments.

Investment

The QC (Quantitative Case)

SPL (Strike Price Logic)

PII doesn’t have a huge options market. Monthly expiries only, with $5 incremental strike prices. So at the time, the two closest but still out of the money puts were $75 and $70, and although it represented A TON of downside protection, the premium for $70 wasn’t enough for me.

So $75 it is.

PII One Year Chart – Courtesy Yahoo Finance

The share price bounced at the $70 level in September and January of this year, so there’s support there. Hopefully if the share price tests that again, it will continue to hold.

QWaF (Qualitative Warm and Fuzzy)

Polaris’ biggest qualitative strength is its brand name. The name represents innovation and quality across the board. Did you know that in terms of market share they are number one in ATVs, commercial and recreational SBS (side by side) utility vehicles,  European quadricycles, and military ULTVs (ultra-light tracked vehicles)? They are also number two in snowmobiles and domestic motorcycles. It’s that impressive brand positioning, that led Jaime Katz, analyst for morningstar, to assign Polaris a “wide moat” rating, and  I’m inclined to agree with her.

It’s also worth noting that the international market for Polaris’ products is ripe for some crazy growth in the near term, and none of their competitors are as well positioned as they are to capitalize on those markets.

CPR (Cold and Prickly Risks)

For whatever reason, 2016 has been the year of spontaneous combustion, and unfortunately Polaris has had some major recall issues this year. The firm’s moat and pricing power is based on name and reputation, so products that catch on fire and burn young children are not the sort of thing you want to read about as an investor.

Their competitors, small as they are, have been investing in innovation lately, and according to many are actually outpacing Polaris in this regard. Those competitors are chomping at the bit to take market share during this recall rough patch.

Finally, the vast majority of the company’s consumer sales are financed, so theoretically the firm’s sales have some degree of interest rate sensitivity. Also these are mostly recreational vehicles, a luxury that some folks might forgo in a global or domestic economic slowdown.

I’m going to give management the benefit of the doubt that they’ll be able to navigate these rough waters in the near term. Past performance does not guarantee future results, but their long history of operational excellence counts for something.

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