Arctic Cat Purrs

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As frost sets in, more than one company will be heating up. Red Envelope (Nasdaq: REDE), along with other retailers such as Blue Nile (Nasdaq: NILE), Overstock (Nasdaq: OSTK), and Electronics Boutique (Nasdaq: ELBO), is aiming to take advantage of a holiday buying frenzy. Arctic Cat (Nasdaq: ACAT), a maker of ATVs and snowmobiles, also prepares to pounce into action at the first sign of snow.

It's a good thing the company's best days are ahead, considering the hair ball results coughed up last quarter. Arctic Cat's revenues of $240.7 million were up 1.3% compared with the same quarter a year ago. The company's earnings fared worse, with net income of $19.7 million -- decreasing 9% compared with the prior-year period.

Amid the mediocre results, the faint purr of its inventory engine revving up can be heard. From March to September, the company's inventory level jumped 73% to $105.6 million. As Arctic Cat prepares to sprint toward strong sales and profits in the coming months, investors may be wondering whether this is a good time to pick up some shares.

At this level, its stock appears to be idling at full price. Accounting for its cash of $30.4 million, along with its lack of long-term debt, the company has an enterprise value of $324.3 million. Also, its trailing 12 months of structural free cash flow (SFCF) is $25.5 million. Given the nice-but-not-earth-shattering company guidance of 4% to 8% revenue and earnings-per-share growth for the rest of the fiscal year (which ends March 31, 2005), Arctic Cat might be fairly valued at an EV/SFCF ratio of 12.7. If this is the case, near-term stock price support will likely hinge on respectable profits in the last half of its fiscal year, as well as reasonably encouraging guidance (that later materializes) for the coming year.

The race across the finish line will be fierce, with Honda (NYSE: HMC), Kawasaki, Polaris (NYSE: PII), Yamaha, Suzuki, and Bombardier all aiming to be No. 1 in either the ATV or snowmobile market (or both). Despite the competition, Arctic Cat has investors listening for one thing: a roar rather than a meow with its winter sales.

Fool contributor Jeremy MacNealy does not own shares in any of the companies mentioned.