Arctic Cat has a bright future

The snowmobile maker is part of a sector that is posting surprising gains.

By StreetAuthority Oct 28, 2013 6:04PM
Arctic Cat T570
© Arctic CatBy David Goodboy

We're told as children (and even as adults) that you can't have your cake and eat it too. You can't turn a hobby into a paying job, and if an activity is fun, there's probably no money in it.

Good news: You can.

It's true that the economy has changed our way of life over the past five years. We're more conscious of saving and downsizing to match our spending habits. The proliferation of fuel-efficient automobiles has crossed into a market that was once thought purely recreational.

Winnebago Industries (WGO) and Harley-Davidson (HOG) are up nearly 75% and 35%, respectively, as baby boomers take to America's roads. Clearly, recreational vehicles are in full swing, but there's yet another type of vehicle that hasn't gotten the attention it deserves: all-terrain vehicles (ATVs).

This category includes snowmobiles, ATVs and utility task vehicles (UTVs). Sales of UTVs have exploded in the past year: The two leading UTV manufacturers have posted quarterly earnings growth of 217% and 185% year over year. Polaris Industries (PII) has been the undisputed leader in UTV, ATV and snowmobile sales, but Arctic Cat (ACAT) has been taking market share away from its larger competitor in the past year and posting better returns on equity while Polaris' return on equity has been in decline.

Brand recognition in the snowmobile segment, aided by its popularity in the Winter Olympics, has allowed Arctic Cat to increase sales in the offseason by 70% from the same period last year. Sales of Arctic Cat's side-by-side ATVs grew 23%, driven by the popularity of its Wildcat and Prowler models. For fiscal year 2013, UTV and ATV sales were up 32% from 2012, led primarily by the ever-growing UTV market where they are generally put to work in a variety of industries from security to golf course management.

A case for the short term can be made by looking at recent results for Vail Resorts (MTN), a mountain resort company. Vail reported less disappointing earnings than widely expected recently, and investors haven't lost a step, sending MTN up 34% this year. Revenues from Vail's mountain segment -- an environment in which Arctic Cat products thrive -- was up 13% year over year.

Arctic Cat has had annual earnings per share (EPS) growth of 78% over the past five years. The future is looking bright as well, with a price/earnings-to-growth (PEG) ratio of just 0.81 and a price-to-sales ratio of just under 1. Arctic Cat holds zero long-term debt and increased its cash holdings by $16 million, to a total of $40 million. For 2013, the company has authorized a stock repurchase plan of $30 million in shares.
Risks to consider: Seasonal weather changes may weigh on sales, and recreational sales are highly dependent upon income levels which could face pressure in the future from growing political concerns regarding debt levels and the impact of the government shutdown.

Actions to take:
The recent earnings miss should be viewed as a buying opportunity at this price. The company maintained positive guidance for 2014 with EPS between $3.27 to $3.37. The sharp sell-off appears to be an overreaction, and based on the relative strength index, ACAT appears oversold. Arctic Cat now looks to be undervalued by around 20%.

David Goodboy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

More from StreetAuthority

Oct 29, 2013 10:10AM
I don't know how long the good times will last as we have contacted two dealers that are giving up their rights as dealers.  The problem is the company tells them what they have to sell and the models they must sell.  Most of the dealers in our area can't sell the more expensive models and, therefore, they are going to stop selling the product. The dealer in Illinois and the one in North Carolina said that the more expensive models set on the floor and they don't even brake even when they have to get rid of them before the next models come out.  So while the company  say they are selling more the dealers aren't and so when all the dealers stop buying the product how good is the company?

So we shall see. 

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