Why Arctic Cat Stock Has Plummeted 20%

Is this meaningful or just another movement?

Jan 24, 2014 at 3:03PM

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Arctic Cat (NASDAQ:ACAT) were frozen out by the market this week, falling as much as 20% after the company missed big in its third-quarter earnings report.

So what: The maker of snowmobiles and other recreational vehicles delivered a per-share profit of just $0.89, below estimates of $1.33. Revenue also missed badly, growing just 3.6% to $225.8 million against expectations of $239.4 million. There were some strong points in the earnings release, as sales grew by double-digits in its ATV/side-by-sides and parts, garments, and accessories segments. CEO Claude Jordan acknowledged in a press release that the company had expected the second half of the year to be "challenging," but said he still expected "strong fourth-quarter sales and earnings, which will be driven by our new Wildcat Trail model." Still, due the previous quarter's weakness, the company reduced full-year EPS projections to $2.90-$3.00 from $3.27-$3.37, and lowered its expected revenue range by 2%.

Now what: Despite higher sales, gross margin fell off a cliff this quarter, dropping from 23.3% to 17.8% due to a new agreement with Yamaha that brought in lower-margin sales, which meant EPS dropped all the way from $1.30 last year. The third quarter is one of the two biggest for Arctic Cat so the miss stings particularly sharply. Overall, Arctic Cat does not seem like a broken brand, as it had crushed estimates in its previous report, but investors may want to get used to this kind of volatility from the discretionary-goods maker whose sales are highly dependent on weather and other factors beyond its control. 

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Fool contributor Jeremy Bowman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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