For aggressive growth, rev up Arctic Cat

After a whopping earnings surprise, the ATV manufacturer expects sales to increase even more.

By Zacks.com Aug 20, 2012 1:27PM

By Zacks Equity Research

Arctic Cat (ACAT) posted a profit in its fiscal 2013 first quarter (ended June 30) and delivered a whopping earnings surprise of 275%. This marks the ninth straight positive earnings surprise for the snowmobile maker. This Zacks No. 1 Rank ("strong buy") is targeting the highest net earnings in its history during fiscal 2013, and has a long-term earnings growth projection of 22%.

 

On July 26, Arctic Cat posted a profit of $2 million, or 14 cents per share, for its fiscal first quarter, a sharp contrast from a loss of $2.3 million or 13 cents in the year-ago quarter. The result also trounced the Zacks consensus estimate of an 8 cents loss. The higher profit was primarily driven by strong sales volumes and a lower cost structure.


Revenue in the quarter climbed 49% to $111.3 million, driven by a significant 93% surge to $73 million for the all-terrain-vehicle (ATV) business. Strong demand for the all-new Wildcat V-Twin 1000i HO pure-sport ROV, Prowler side-by-side utility vehicles and core ATVs fueled growth in the business.


Strong outlook

For fiscal 2013, Arctic Cat foresees continued growth in its ATV/ROV business and expects to boost profitability through operational efficiencies and cost-reduction measures. The company anticipates sales to increase between 13% and 17% to the range of $662 million to $682 million. Earnings per share are expected to shoot up 48% to 54% to between $2.55 and $2.65 for the year.


Earnings momentum moves higher

Most analysts raised their estimates for both fiscal 2013 and 2014 over the last 30 days. For 2013, the Zacks consensus estimate has gained 7.5% or 20 cents to $2.86, driven by upward revisions from five of 7 estimates. For 2014, the Zacks consensus estimate advanced 2.7% or 9 cents to $3.44, again on upward revisions from 5 of 7 estimates. The estimates for 2012 and 2013 reflect double-digit annualized growth of 66.2% and 20.2%, respectively.


Valuation is reasonable

Arctic Cat is currently trading at a forward price-to-earnings ratio of 15.1, a discount of 10.7% to the peer group average of 16.9. The price-to-book ratio of 4 is at a premium of 53.8% compared to the peer group average of 2.6. The company has a price/earnings to growth ratio of 0.69, which indicates that the stock is reasonably valued given the expected growth. Moreover, the company has a one-year return on equity of 21.9%, which is much higher than its peer group average of 13.9%.


Chart looks promising

After moving sideways with the 50-day and 200-day moving averages for about a year, the stock started outperforming since late 2011, except a short span in the second quarter of 2012, where it tumbled from the 50-day moving average after reaching its 52-week high of $47.46 on April 20.

 

Incorporated in 1982 and headquartered in Plymouth, Minn., Arctic Cat manufactures snowmobiles and ATVs under the Arctic Cat moniker and supplies related parts, garments and accessories. The company, which competes with Honda Motor Co., Ltd. (HMC) and Polaris Industries, Inc. (PII), operates through a network of independent dealers in the U.S., Canada and Europe and through distributors in Russia, South America, the Middle East, Asia and other international markets.


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