Investing.com -- Citi downgraded Polaris (NYSE:PII) Inc and BRP Inc (NASDAQ:DOOO) to Sell from Neutral given the deteriorating fundamentals, growing tariff risks, and a worsening promotional environment in the U.S. leisure market.

Citi cut its price targets to $33 for Polaris and $41 for BRP, warning that potential tariffs on Mexico and Canada could significantly erode earnings.

Citi’s note highlighted that both companies face immediate challenges from an incremental 20% Chinese tariff, bringing the total to 30%, and the potential for indefinite 25% tariffs on Mexican and Canadian imports.

“Were 25% tariffs on Mexican and Canadian imports to be levied indefinitely (an unlikely but distinct possibility), we believe that both companies would immediately incur significant losses, impacting their long-term prospects,” Citi said.

Polaris' North American off-road vehicle (ORV) retail sales are trending toward a low-double-digit decline in Q1, with high-teens declines in February and a mid-single-digit drop in early March, according to Citi's dealer checks.

Dealers reported weakening sentiment and elevated inventory levels despite shipment cuts from PII and DOO.

“The dealer consensus is that price increases from tariffs will be bad for the industry, with most expecting at least some incremental slowdown as a result,” the note added.

Polaris derives about $2 billion of its revenue from products imported from Mexico to the U.S., with 30% margins on those products. Citi estimates that a 25% Mexican tariff could reduce EPS by $4.60, while additional impacts of $0.66 from China and $0.16 from Canada could push Polaris’ 2025 earnings from a guided $1.10 to a $4.00 loss.

For BRP, with 70% of its cost of goods sourced from Mexico, Citi estimates a potential EPS cut of over $11 in a full-tariff scenario, leaving the company in an equally “untenable situation.”

Citi’s revised targets reflect the risk of permanent tariff scenarios and weaker near-term fundamentals. Polaris faces potential dividend and debt covenant challenges if tariffs escalate, while BRP’s heavy reliance on Mexican imports makes it especially vulnerable.

Even in the absence of extreme tariff scenarios, the weakening of fundamentals in conjunction with the incremental Chinese tariffs is enough to weigh on valuations going forward.

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