Summers are all about fun in the sun. Sporting a beach towel and flip-flops, the market has turned a cold shoulder to snowmobile and ATV manufacturer Arctic Cat (Nasdaq: ACAT), a Motley Fool Hidden Gems watch list selection.
Since its high of around $28 last winter, the stock has now melted to about $22. What's the reason for the recent weakness? A glance through Arctic Cat's latest quarterly report offers some clues.
For the fourth quarter of fiscal 2005, net sales were $157 million, a healthy increase of 12% compared with the same period a year ago. The strongest revenue growth came from snowmobiles, whose sales increased 113%. Unfortunately, revenues from this division make up a small percentage of Arctic Cat's overall sales -- $11 million in the latest period vs. $117.1 million in sales from the ATV division.
ATV sales did indeed increase by 12%. However, revenues from parts, garments, and accessories were disappointing, declining 6% to $29 million. The decrease was blamed on mild winter weather.
Aside from mild weather, escalating raw materials costs stalked Arctic Cat. However, even with those rising prices, the company's cost of goods as a percentage of sales for the quarter actually decreased to 83% vs. 85% from the fourth quarter of 2004. The ability to improve margins in the face of higher costs led to a profitable quarter, with net income of $2.7 million compared with a net loss of $1 million a year ago.
The quarter's profitability brought the company's year-end diluted earnings to $1.36 per share. Looking to the next fiscal year, Arctic Cat expects to stay in the same vicinity, with estimated earnings of $1.31 to $1.40 per share. Though sales are expected to increase year over year by 3% to 5%, Arctic Cat anticipates earnings remaining flat due to high raw materials prices, lower snowmobile sales, and an unfavorable yen/dollar exchange.
Although there are rumors that snowmobiles are becoming less popular, Arctic Cat seems to be competing substantially on ATV market share with competitor Polaris (NYSE: PII). Arctic Cat has also hinted at acquisitions, which could trigger considerable growth.
The recent stock meltdown seems to be a result of a flat earnings growth forecast, not because of any fundamental company troubles. So, for Foolish investors, the challenging year ahead may be a good time to purchase some shares on the cheap. The market appears to have written off Arctic Cat for the year -- which makes this an opportune time to add the company to your own watch list.
Fool contributor
Jeremy MacNealy
does not own shares in any of the companies mentioned.
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