A short, warm winter is not the ideal scenario for Polaris ( PII), the world's largest maker of snowmobiles. And although the Minnesota-based company is also second in the all-terrain vehicle (ATV) market, when it reports fourth-quarter results Thursday, expectations are that management will post its first annual earnings decline in the past decade.

With those fundamental clouds hanging over it, at Tuesday's closing price of $45.48, the company's stock sits about 39% off its March 2005 high of $73.05. Currently valued at 15.2 times expected 2007 earnings of $2.96 a share, the company is trading at a 12% discount to its average historical valuation.

Now let's take a deeper look at the company and answer investors' questions: Should I do it? Can Polaris shares plow higher, or will the stock remain stuck in the mud?

Despite its current, seasonal struggles, management presented an upbeat long-term outlook at the company's analyst meeting Jan. 18. Polaris is targeting earnings per share of $4.25 by 2009 (20% compound annual growth) and revenue of $2.2 billion (14.5% CAGR), led by new products in its Victory motorcycle and utility cart lines. These two divisions currently account for 25% of the company's total revenue.

In the meantime, Polaris remains focused on reducing ATV inventories. At the wholesale level, supply is at 105 to 110 days worth of sales. That is down from 180 in the first half of 2006 but still well above the historical average of 60 to 90 days. As the company does not expect a meaningful recovery in ATV retail demand until 2008, Polaris will likely have to increase promotional activity.

However, I believe that the market has already factored in these challenges. At the Jan. 18 meeting, management raised the quarterly payment to 34 cents a share, boosting the dividend yield to an attractive 3% at current levels. Polaris has boosted its payout 12 consecutive years, and despite its current woes, the payout can be comfortably covered with 46% of expected 2007 earnings. Investors at the close of trading Jan. 29 will qualify for the Feb. 15 dividend.

In addition to the dividend, Polaris bought back $200 million of stock in December and has pledged to repurchase another 4.8 million shares (about $218 million) over time. As well as supporting the share price by absorbing shares being sold, management said that the buyback should add 11 cents a share to 2007 earnings.

So Polaris shares are already pricing in the weakness in the core snowmobile and motorcycle markets, while the company continues to generate solid cash flow and return it to shareholders through dividends and a stock buyback. With that in mind, I believe that investors should consider Polaris shares, because they could trade toward the mid-$50s over the coming quarters.

David Peltier is a research associate at TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback; click here to send him an email.

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