Polaris continues to deliver better-than-expected results, benefiting from persistent demand in response to well-received product launches and healthy growth in recently acquired businesses. While our narrow moat is predicated on strength in the firm’s brand and traditional product categories, we believe acquisitions and expansion into adjacent businesses could act as a major catalyst for earnings over the next decade.

Shares are up 54% year to date and trade at 21 times our 2014 earnings per share estimate. This valuation appears reasonable to us, with earnings growth anticipated in the double-digit range again in 2014, excluding any potential acquisitions. We are maintaining our $137 fair value estimate, which could tick up modestly as we incorporate recent results into our model.

Overall, we view the third quarter as a success, although the firm outperformed and underperformed our forecasts in certain categories. Off-road vehicles performed better than we had expected, increasing revenue 23% year over year to $702 million, as Ranger and RZR XP1000 demand helped deliver robust retail sales.

Sales for the segment are now anticipated to grow 11%-12% for the full year (up from previous guidance of 8%-10%). Snowmobiles also surprised us with 25% growth, as the company moved shipments earlier in the year to better serve dealer and consumer demand. However, this strength is expected to reverse in the fourth quarter, keeping expectations of low-single-digit growth intact. Parts, garments, and accessories sales grew 37%, slightly faster than we expected, although full-year guidance was also maintained.

We were disappointed that on-road segment sales fell nearly 6%, but were reassured that this figure represents shipments rather than sales and that management’s full -year outlook remains in place. Costs remained well managed, with the gross margin expanding 90 basis points to 30.4%, helped by better productivity, sourcing, and pricing on product.