Sales up, losses up. Sales up, profits down.
That pretty much sums up the quarterly and annual results that ATV- and snowmobile-maker Arctic Cat (Nasdaq: ACAT) announced on Tuesday. For the fiscal fourth quarter 2007, the company reported sales 13% better than it had posted in Q4 of last fiscal year, even as its loss widened to $0.08 per diluted share. Similarly, for the year, Arctic Cat's 7% improvement in annual sales wasn't enough to keep its profits from sliding 4% in comparison with fiscal 2006.
But if the news was so bad, why is the stock up nearly 6% as we close out the week? Let's find out.
A tale of two kitties
The reason Arctic Cat's stock is soaring, it seems to me, is one of two things. Either investors allowed themselves to be wowed by full-year earnings projections that exceeded expectations, or the other thing, which I'll get to in a moment. The "guidance" theory goes like this: Arctic Cat aims to reduce its snowmobile production by 30% this year, to allow demand to catch up with dealer inventory already in the pipeline.
That cutback in production will hurt sales comparisons in the current, first fiscal quarter, as the firm expects to sell no more than $80 million worth of product, and perhaps double last year's Q1 loss to $0.47 per share. However, thanks to that other reason, Arctic Cat expects ATV sales to put it back in black by year-end, contributing to full-year sales of as much as $736 million, and full-year profits which may reach $0.95 per share.
Foreshadowing unshadowed
Now for the mysterious other reason to be bullish on Artic Cat. In a word, it's market share. (OK, two words.) You see, unlike rival Polaris (NYSE: PII), which last month reported a 4% decline in sales on slack demand for ATVs, Arctic Cat sold 15% more ATVs last quarter than one year previous. That supports CEO Christopher Twomey's assessment that the company "gained further market share in our ATV and snowmobile businesses, as our retail sales continued to outpace these industries." It also lends credence to his assertion that the firm will enjoy "further ATV sales growth" throughout this year.
Simply put, with Polaris reporting declining sales, and Arctic Cat reporting the opposite, it looks like the latter is chowing down on the former's lunch. Reason enough to raise the price of the latter's shares by 6%? Yes, I think it is.
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Fool contributor Rich Smith does not own shares of either company named above.
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