Moderate industry growth seen
September 9, 2004
Filed under Features
By Tim Conder
The outlook remains one of moderate growth. Overall, our thesis relating to each of the powersport segments (ATV, snowmobiles and PWC) continues to be that each of the segments in the longer-term should grow at least in-line to double the rate of overall gross domestic product (GDP) growth.
We feel that growth in consumer spending as it relates to leisure and recreation is sustainable based upon two broad trends:
n Demographics. Peak spending by individuals does not occur until age 46–47 with leisure spending peaking near age 52. The largest portion of baby boomers will not reach 46-47 for approximately 4-5 years.
n Emphasis on recreation. There is an ongoing positive shift in attitudes toward vacation and leisure activities, especially those involving the family.
Specifically, we expect ATV growth over the next several years to be in the mid-single digit range, assuming a “normal” economy. This segment remains the most under penetrated of the three major powersports segments (30%-35% of purchases are from first time buyers).
Additionally, ATV sales appear less volatile because they are sold across all regions of the country, they have multiple applications that allow use year- around, and they are less affected by regional weather patterns.
Snowmobile growth will continue to be closely tied to winter weather patterns. However, longer-term (adjusting for a more normal weather pattern in the Upper Midwest and Northeast regions) we feel this segment can grow in the mid-single digit range. It will be driven by favorable demographics and a high repeat purchase pattern of users (approximately 90% of sales are repeat buyers).
The PWC market probably bottomed in 2002 and should see, at worst, stability over the next two to three years given the current positive economic environment, and a much improved regulatory environment, given the new/cleaner four-stoke engine technology.
Long-term we see this market growing in the low single digits.
The U.S. retail ATV market grew by 7.8% in the first quarter this year, but growth in the market slowed in the second quarter with several dealers saying that they saw a noticeable slowdown in May and June retail ATV sales. The Motorcycle Industry Council (MIC) reported that second quarter 2004 U.S retail registrations of ATVs were down 4.7% resulting in year-to-date registration growth of 0.5% through June.
It is important to note that international sales and sales from non-MIC members, such as Chinese/Korean manufacturers of units with displacement smaller than 250cc are not included in U.S. retail industry data.
No clear reason for the May/June industry slowdown was evident. However, we continue to believe the key basics of:
n Rising consumer confidence. ATV unit sales are 50%-55% immediately correlated to consumer confidence, especially among households earning over $50,000/year. The average ATV consumer earns $57,000/year and is 43 years old.
n First Time Buyers. Thirty to thirty-five percent of ATV buyers are first time buyers, a factor that should remain favorable for the industry over the balance of 2004 and into 2005.
Therefore, we feel comfortable that our 2004 and 2005 ATV worldwide industry growth of 5.2% and 5.7%, respectively is reasonable, as well as continued mid-high single digit growth over the next decade.
Specifically, in 2004 we see U.S. unit growth of 4.5%, Canada unit growth of 8.0%, and international unit growth of 8.5%. Looking out over the next 3-5 years, we feel that ATV global market unit growth should continue to experience modest mid-single digit growth.
As we have indicated for the past few surveys, we believe the personal watercraft market reached a trough in 2002.
The industry posted modest 2003 North American growth of approximately 0.4%. We feel that momentum can continue with consecutive years of unit growth in 2004 and 2005 of 1.6% and 2.0%, respectively.
Improving consumer confidence in 2004 bodes well for PWC Industry, as sales are 65% correlated with Present Situation index — a subset of the consumer confidence index.
We believe that long-term, the PWC market can sustain low to mid-single digit growth driven by continued shift to 4-stroke engine technology, a favorable demographic customer base, and a more rational regulatory environment.
Industry pre-season orders are below expectations, as dealers look to take product closer to the snowmobile season. Industry dealer inventories are significantly cleaner year-over-year. Many dealers said:
n Significantly less carry-over inventory (industry pipeline inventories down 23% according to Polaris) exists.
n This was the first year they will order measurably more new product since the 2002/2003 season (i.e., summer 2002), but with later delivery from manufacturers.
Given the significant cleaner dealer channel inventories, we feel confident that the snowmobile market will experience growth in the 2004/2005 season. We estimate that retail unit sales of sleds will increase approximately 2.8% in the 2004/2005 season, with higher growth expected internationally versus the more mature North American market.
From a market share perspective, we expect that Polaris will gain back some share in 2004/2005 driven by new Fusion (using PII’s newly developed “IQ” chassis) after losing share last year to industry leader Bombardier. PSB