Our recent Top Buy pick was Polaris (PII), a top maker of small vehicles such as ATVs, “side-by-sides”, snowmobiles, golf-cart like people movers, European smart-car like quadricycles, and, increasingly, motorcycles.

You might be thinking the same thing as I did when I first looked at the company: can this really be a sustainable, great business like we are looking for from the Magic Formula screens?

After all, vehicles don’t have any built-in economic moat advantages. There are no switching costs, no regulatory protections, no network effect… Nothing that would preclude customers from dropping a brand and moving to a competitor. In theory, that should limit the economic potential for any player in this market.

But, in fact, like Apple (AAPL) in consumer electronics or Starbucks (SBUX) in coffee shops, Polaris has managed to generate outsized returns on capital and returns to shareholders in a competitive market, through a company culture of innovation, efficient manufacturing, and superior management. I believe the company can continue this track record, and with the stock down over 30%, now is one of the best times to get in since the recession days of 2009.

Here are 3 reasons we like the stock, as well as a discussion of the risks involved.

Outstanding Track Record and Management

Have a look at Polaris’ post-tax returns on capital over the past decade:

Pretty good, right?! Consistently at or over 30%, which is simply outstanding. And these are no “cruising” returns on capital either. Over that period, Polaris has grown revenues at at 10% annual clip while improving operating margins from about 11% in 2005 to almost 16% today. Share count is down 23% in that time, and the dividend has been hiked every year at an average annual growth rate of 12.6%. All together, earnings per share grew 19.1% annually in this period, and the stock increased 6-fold in price.